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25 Dec 2018

A company paid its $2.00 dividend yesterday (that means, D0 = $2 The company is expecting a constant growth in dividends of 5%. We have determined that the value of the stock today should be the present value of the dividends received for the period we hold it, plus the present value of the stock price when we expect to sell it. Is the Value Today dependent upon how long you plan to hold the stock? Explain.

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Jarrod Robel
Jarrod RobelLv2
28 Dec 2018

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Suppose a firm's common stock paid a dividend of $2 yesterday. you expect the dividends to grow at a rate of 5% per year forever. the discount rate is 12%. a. you expect the price of the stock 3 years from now to be $34.73. If you buy the stock today and plan to hold it for 3 years, what payments will you recieive? what is the present value of those payments? b. assume g=5% and is constant, calculate the present value of this stock using the constant growth model formula. compare it to your answer in part a. c. is the value of this stock dependent on how long you plan to hold it?

Your broke offers to sell you some shares of Bahnsen & Co. common stock that paid a dividend of $2.00 yesterday. Bahnsen's dividend is expected to grow at 5% per year for the next 3 years. If you buy the stock, you plan to hold it for 3 years and then sell it. The appropriate discount rate is 12%.

a. Find the expected dividend for each of the next 3 years; that is, calculate D1, D2, D3. Note that D0 = $2.00.

b. Given that the first dividend payment willl occur 1 year from now, find the present value of the dividen stream; that is, calculate the PVs of D1, D2, D3 and then sum these PVs.

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 furture 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 today?

e. Calculate the present value of this stock. Assume that g = 5% and that it is constant.

f. 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, P0? Explain.

Constant Growth Stock Valuation

You are analyzing Jillian’s Jewelry (JJ) stock for a possible purchase. JJ just paid a dividend of $2.75 yesterday. You expect the dividend to grow at the rate of 6% per year for the next 3 years, if you buy the stock; you plan to hold it for 3 years and then sell it.

What dividends do you expect for JJ stock over the next 3 years? In other words, calculate D1, D2 and D3. Note that D0 = $2.75. Round your answers to the nearest cent.

D1 = $

D2 = $

D3 = $

JJ's stock has a required return of 11%, and so this is the rate you'll use to discount dividends. Find the present value of the dividend stream; that is, calculate the PV of D1, D2, and D3, and then sum these PVs. Round your answer to the nearest cent.
$

JJ stock should trade for $69.44 3 years from now (i.e., you expect = $69.44). Discounted at a 11% rate, what is the present value of this expected future stock price? In other words, calculate the PV of $69.44. Round your answer to the nearest cent.
$

If you plan to buy the stock, hold it for 3 years, and then sell it for $69.44, what is the most you should pay for it? Round your answer to the nearest cent.
$

Use the constant growth model to calculate the present value of this stock. Assume that g = 6%, and it is constant. Round your answer to the nearest cent.
$

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 stock today, ? Explain your answer.
-Select-IIIIIIIVVItem 8
I. Yes. The value of the stock is dependent upon the holding period. The value calculated in Parts a through d is the value for a 3-year holding period. It is not equal to the value calculated in Part e. Any other holding period would produce a different value of .
II. No. The value of the stock is not dependent upon the holding period. The value calculated in Parts a through d is the value for a 3-year holding period. It is equal to the value calculated in Part e. Any other holding period would produce the same value of .
III. Yes. The value of the stock is dependent upon the holding period due to the fact that the value is determined as the present value of all future expected dividends.
IV. No. The value of the stock is not dependent upon the holding period unless the growth rate remains constant for the foreseeable future.
V. Yes. The value of the stock is dependent upon the holding period as long as the growth rate remains constant for the foreseeable future.

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