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# Your broke offers to sell

Your broke offers to sell you some shares of Bahnsen & Co. common stock that paid a dividend of \$2.00 yesterday. Bahnsen’s dividend is expected to grow at 5% 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 12%.a. Find the expected dividend for each of the next 3 years; that is, calculate D1, D2, D3. Note that D0 = \$2.00.b. Given that the first dividend payment willl occur 1 year from now, find the present value of the dividen stream; that is, calculate the PVs of D1, D2, D3 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 P3 to equal \$34.73. Discounted at a 12% rate, what is the present value of this expected furture 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. Calculate the present value of this stock. Assume that g = 5% and that 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 was 2 years or 5 years rather than 3 years, would this affect the value of the stock today, P0? Explain.