# value of this stock

Suppose a firms common stock paid a dividend of $2 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 then sell it.

A- Find the expected dividend for each of the next 3 years, that is, calculate D1, D2, and D3. Note that D0 = $2

B- Given that the appropriate discount rate is 12% and the first of these dividend payments will occur 1 year from now, find the present value of the dividend stream: That is, calculate the PV of D1, D2, and D3, and the sum of these PV's

C- You expect the price of the stock 3 years from now to be $34.73. That is you expect P3 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 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 8-2 to calculate the present value of this stock. Assume that g = 5% and it is constant.

F- Is the value of this stock dependent on 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 sock today? P(hat) )?

#### Solution Preview

Suppose a firms common stock paid a dividend of $2 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 then sell it.

A- Find the expected dividend for each of the next 3 years, that is, calculate D1, D2, and D3. Note that D0 = $2

Here D0=2.00, g=5%

D1=D0*(1+g)=2.00*(1+5%)=2.10

D2=D1*(1+g)=2.10*(1+5%)= 2.205

D3=D2*(1+g)=2.205*(1+5%)=2.31525

B- Given that the appropriate discount rate is 12% and the first of these dividend payments will ...

#### Solution Summary

The value of this stock is weighed.