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.
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 ...
The solution lists all the steps for the financial calculator and also explains the process, and calculates the answers.