Integrated Potato Chips paid a $1.50 per share dividend yesterday. You expect the dividend to grow...

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	$	$	$

Solutions

Expert Solution

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

	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

jeff jeffy answered 1 month ago

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