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Unformatted text preview: Expect ed Cash f low ($80) $80 1 yr. 5 yr. 10 yr. Time 35. Beasley Ball Bearings paid a $4 dividend last year. The dividends is expected to grow at a constant rate of 6 percent over the next four years. The required rate of return is 13 percent (this will also serve as the discount rate in this problem). Round all values to three places to the right of the decimal point where appropriate. a. Compute the anticipated value of the dividends for the next four years. That is D 1 ,D 2 ,D 3 , and D 4 : For example D 1 is $4.24($4x1.06) b. Discount each of these dividends back to the present at a discount rate of 13 percent and then sum them. c. Compute the price of the stock at the end of the fourth year (P 4 ). (D 5 is equal to D 4 times 1.06) Solution: a. D 1= $4(1.06)=$4.24 D 2= $4.24(1.06)=$4.494 D 3= $4.494(1.06)=$4.764 D 4=$4.764(1.06)=$5.049 B. b. Dividends PV(13%) PV of Dividends D 1 $4.24 .885 $ 3.752 D 2 4.494 .783 3.518 D 3 4.764 .693 3.301 D 4 5.049 .613 3.095 $13.666 C....
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 Winter '11
 STEVEJOSEPH
 Dividends

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