In: Finance
Integrated Potato Chips paid a $1.50 per share dividend yesterday. You expect the dividend to grow steadily at a rate of 6% per year. |
a. |
What is the expected dividend in each of the next 3 years? (Do not round intermediate calculations. Round your answers to 2 decimal places.) |
Expected Dividend | |
Year 1 | $ |
Year 2 | |
Year 3 | |
b. |
If the discount rate for the stock is 10%, at what price will the stock sell today? (Do not round intermediate calculations. Round your answer to 2 decimal places.) |
Current price | $ |
c. |
What is the expected stock price 3 years from now? (Do not round intermediate calculations. Round your answer to 2 decimal places.) |
Future price | $ |
d. |
If you buy the stock and plan to hold it for 3 years, what payments will you receive? What is the present value of those payments? (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations. Round your answers to 2 decimal places.) |
d. |
If you buy the stock and plan to hold it for 3 years, what payments will you receive? What is the present value of those payments? (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations. Round your answers to 2 decimal places.) |
Year 1 | Year 2 | Year 3 | ||||
Dividend | $ | $ | $ | |||
Sale of stock | ||||||
Total cash flow | $ | $ | $ | |||
PV of cash flow | $ | $ | $ | |||
a.Year 1 = 1.5(1.06) = $1.59
year 2 = 1.5(1.06)2 = $1.6854
Year 3 = 1.5(1.06)3 = 1.7865
b.Price = Expected Dividend/(Required Rate of return – growth rate)
= 1.59/(10%-6%)
= $39.75
C.Price 3 years from now = Dividend year 4/(required return – growth rate)
= 1.7865(1.06)/4%
= $47.34
d.
Year 1 |
Year 2 |
Year 3 |
||||
Dividend |
$ 1.59 |
$ 1.69 |
$ 1.79 |
|||
Sale of stock |
|
|
47.34 |
|||
Total cash flow |
$ 1.59 |
$ 1.69 |
$ 49.13 |
|||
PV of cash flow |
$ 1.45 |
$ 1.40 |
$ 36.91 |
|||
Total present value = $39.76