Question

In: Finance

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

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


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