Answer:
Kindly check explanation
Step-by-step explanation:
Given that:
Dividend paid (D) = $2
Growth rate (g) = 4% per annum = 0.04
Expected Dividend in each of the next 3 years :
1st year : $2 * 1.04 = $2.08
2nd year : $2.08 * 1.04 = $2.16
3rd year: $2.16 * 1.04 = 2.2464 = $2.25
B) If the discount rate for the stock is 12 percent, at what price will the stock sell?
Discount rate (r) = 12% = 0.12
Price of stock = Dividend / (r - g)
Price of stock = 2 / (0.12 - 0.04)
Price = 2 / 0.08 = $25
c. What is the expected stock price 3 years from now?
(2.25 * 1.04) / 0.08
2.34 / 0.08 = $29.25
D) If you buy the stock and plan to hold it for 3 years, what payments will you receive? What is the present value of those payments?
Dividend to be received from year 1 to 3
2.08, 2.16, 2.25
Stock price in 3rd year = 29.25
Present value :
(29.25/1.12^3) + (2.25/1.12^3) + (2.16/1.12^2) + (2.08 / 1.12^1) = 26.00
For year 1 :
D = 2.08
Stock price = 2.16/0.08 = 27
Present value (PV) = (27/1.12) + (2.08/1.12) = 25.96
Year 2 :
D = 2.16
Stock price = 2.25/0.08 = 28.125
cashflow = (2.16 + 28.125) = 30.285
PV = (28.125/1.12^2) + (2.16/1.12^2) + (2.08/1.12^1) = 26.00
Year 3:
D = 2.25
STOCK PRICE = 29.25
Total Cashflow = (2.25 + 29.25) = 31.5
PV = (31.5/1.12^3) + (2.25/1.12^3) + (2.16/1.12^2) + (2.08/1.12^1) = $27.60
