Finance: Steps on TI BA II Plus; Swift & Co, expected dividend, PV, value in 2 or 5 yrs
Walk me through the steps to do this on a TI BA II Plus and the rationale.
Your broker offers to sell you some shares of Swift and Co. common stock that has just paid an annual dividend of $2.00 (yesterday). You expect the dividend to grow at the rate of 5% per year for the next 3 years, and, if you buy the stock, you plan to hold it for 3 years and then sell it. (Pr. 10-14)
a. Determine the expected dividend for each of the next 3 years; that is, calculate D1, D2, and D3. (Note: D0 = $2.00.)
b. Swift and Co.'s appropriate discount rate is 12%; the first of the expected dividend payments will occur 1 year from now. Calculate the present value of the dividend stream; that is, calculate the PV of D1. D2, and D3, and then sum these PVs.
c. You expect the price of Swift and CO. common stock to be $34.73 three years from now; that is, you expect P(hat)3 to equal $34.73. Discounted at a 12% rate, what is the present value of this expected future stock price? In other words, calculate the PV of $34.73.
d. If you plan to buy the stock, hold it for 3 years, and then sell it for $34.73, what is the most you should pay for it?
e. Use Equation 10-2a (p. 395) to calculate the present value of this stock. Assume that g = 5%, and it is constant.
f. Is the value of the stock dependent upon how long you plan to hold it? In other words, if your planned holding period were 2 years or 5 years rather than 3 years, would this affect the value of the stock today, P(hat)0?
SHOW ALL WORK.
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Solution Preview
a) D1=D0*(1+5%)=$2.1
D2=D1*(1+5%)=2.205
D3=D2*(1+5%)=2.31525
b) PVD1=D1/(1+12%)=1.875
PVD2=D2/[(1+12%)^2]=1.7578125
PVD3=D3/[(1+12%)^3]=1.647949219
PVs=PVD1+PVD2+PVD3=5.281
c) PVP(hat)3=34.73/[(1+12%)^3]=24.72
d) This value should be equal to the present values of all the annual dividends and stock price at the third year.
The most I would like to pay=PVs+PVP(hat)3=$30
e) The present value of a stock is ...
Solution Summary
The solution lists all the steps for the financial calculator and also explains the process, and calculates the answers.