Your broker offers to sell you some shares of Bahnsen & Co common stock that 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 and then sell it. If you plan to sell the stock at the end of 3 years at $34.73 , what is most you should pay for it today? The discount rate you use is 12%.
Solution
Solution.
Growth rate = 5%, 1+.05 or 1.05
Next year dividend = $2 x 1.05 = 2.1
Subtract growth rate from the discount rate = 12% - 5%
= 7%
Value of stock = 2.1 / 7% = $30
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Your broker offers to sell you some shares of Bahnsen & Co common stoc.docx
1. Your broker offers to sell you some shares of Bahnsen & Co common stock that 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 and then sell it. If you plan to sell the
stock at the end of 3 years at $34.73 , what is most you should pay for it today? The discount rate
you use is 12%.
Solution
Solution.
Growth rate = 5%, 1+.05 or 1.05
Next year dividend = $2 x 1.05 = 2.1
Subtract growth rate from the discount rate = 12% - 5%
= 7%
Value of stock = 2.1 / 7% = $30
