Question

Your broker offers to sell you some shares of Bahnsen & Co. common stock that paid a dividend of $1.00 yesterday. Bahnsen's dividend is expected to grow at 4% 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 10%. Find the expected dividend for each of the next 3 years; that is, calculate D1, D2, and D3. Note that D0 = $1.00. Round your answer to the nearest cent.

Answer 1

D1 = 1.04

D2 = 1.0816

D3 = 1.124864

Step-by-step explanation:

Given that,

For the next 3 years,

Bahnsen's dividend is expected to grow(g) = 4% per year

Discount rate = 10%

Expected dividend for each of the next 3 years,

Denoted by D1, D2, and D3

Note that D0 = $1.00

D1 = D0 × (1 + g)

= 1 × (1 + 0.04)

= 1.04

`D2 = D0*(1 + g)^(2)`

`D2 = D0*(1 + 0.04)^(2)`

= 1.0816

`D3 = D0*(1 + 0.04)^(3)`

= 1.124864

Therefore,

D1 = 1.04

D2 = 1.0816

D3 = 1.124864