July 2009
Strictly for course AB102 (2009) internal circulation only.
Nanyang Business School
AB102 Financial Management
Tutorial 6: Stocks and Their Valuation
(Common Questions)
1) (919)
Constant growth
.
Your broker offers to sell you some shares of Bahnsen & Co.
common stock that paid a dividend of $2
yesterday
.
Bahnsen’s dividend is expected to grow at 5
percent 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.
The appropriate discount rate is 12 percent.
a) Find the expected dividend for each of the next 3 years; that is, calculate D
1
, D
2
, and D
3
.
Note
that D
0
= $2.00.
b) Given that the first dividend payment will occur 1 year from now, find the present value of the
dividend stream; that is, calculate the PV of D
1
, D
2
, and D
3
, 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
3
P
e
to
equal $34.73.
Discounted at a 12 percent rate, what is the present value of this expected future
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) Use Equation 92
g
r
D
P
s

=
1
0
u
to calculate the present value of this stock.
Assume that g =
5%, and 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 were 2 years or 5 years rather than 3 years, would this affect the value
of the stock today,
0
P
e
? Explain.
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 Spring '10
 dfsf
 Dividend, P/E ratio, PEG ratio, 5year growth rate

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