Question

Bristol-Myers Squibb Company (stock ticker is BMY) is expected pay a dividend of $1.86 per share at the end of this year and a $1.92 per share dividend at the end of the second year, you expect its stock price to be $62.10 per share. Bristol-Myers Squibb's cost of equity capital is 13% per year.

a. What is the most that an investor would be willing to pay today for a share of Bristol-Meyers Squibb stock if the investor plans to hold the stock for two years?

The highest price the investor should pay is: __

b. What is the most that an investor would be willing to pay today for a share of Bristol-Meyers Squibb stock if the investor plans to hold the stock for twenty years?

The highest price the investor should pay is:__

c. At the end of the second year (e.g., at time t=2), immediately before Bristol-Meyers Squibb pays the $1.92 per share dividend, at what price would you expect shares of Bristol-Meyers Squibb stock to be selling?

Immediately before the time t=2 dividend is paid, a share of Bristol-Meyers Squibb stock should be selling for: __

Answer 1

lets start with the basic concept;-

baisc concept is that price of any particular security is present value of the future cashflow of that security

a.

for two years holding

amonunt recieve after one year = $1.86

amount recieve after two years = $1.92+$62.10 = $64.02

price of the stock = (1.86/1.13)+(64.02/1.132) = 1.6460+50.1371 = 51.7831

b.

first of all lets calculate the growth rate = (1.92/1.86)-1 = 3.226%

so present value of all the dividend till 20 years = [P/(r-g)]*[1-{(1+g)/(1+r)}ⁿ]

= [1.86/(0.13-0.03226)]*[1-{(1+.03226)/(1+0.13)}²⁰]

= 15.9137

price of the stock = 15.9137 + (62.10/1.1320) = 15.9137+5.3892

= $21.3029

c.

here it means we are not goint to receive second dividend so

amount receive after one year = $1.86

amount receive after two years = $62.10

price of the stock =(1.86/1.13) + (62.10/1.132) = $50.2794

i hope my efforts will be fruitful to you......