Q-1. (A)Your broker offers to sell you some shares of Bahnsen & Co. common stock that
paid a dividend of $3.5 yesterday. Bahnsen’s dividend is expected to grow at 10%, 12%
and 18% per year for the next 3 years respectively. If you buy the stock, you plan to
hold it for 3 years and then sell it. Bahnsen’s beta is β = 1.8, risk free rate is RF = 6.5%
and risk-premium on market is RPM = 7%.
i. Find the expected dividend for each of the next 3 years.
ii. Given that the first dividend payment will occur 1 year from now, find the present
value of the dividend stream and then sum these PVs.
iii. You expect the price of the stock 3 years from now to be $65.00. Discounted at a
required rate of return, what is the present value of this expected future stock price?
iv. If you plan to buy the stock, hold it for 3 years, and then sell it for $65.00, what is the
most you should pay for it today?
v. Using constant dividend growth model, calculate the price of this stock today. Assume
that g is 8% and that it is constant.
vi. Is the value of this stock dependent upon how long you plan to hold it? In other words,
if your planned holding period was 2 years or 5 years rather than 3 years, would this
affect the value of the stock today? Explain.