Question

Integrated Potato Chips just paid a $1.5 per share dividend. 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.) 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.) c. What is the expected stock price 3 years from now? (Do not round intermediate calculations. Round your answer to 2 decimal places.) d. If you buy the stock and plan to sell it 3 years from now, what are your expected cash flows in (i) year 1; (ii) year 2; (iii) year 3? (Do not round intermediate calculations. Round your answers to 2 decimal places.) e. What is the present value of the stream of payments you found in part (d)? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Answer 1

a)

year	Dividend
1	1.5(1+.06)= 1.59
2	1.59(1+.06)=1.69
3	1.69(1+.06)=1.79

b)Price = D0(1+g)/(rs-g)

           = 1.5(1+.06)/(.10-.06)

            = 1.5*1.06/.04

           = $ 39.75 per share

c)Stock price in 3 years = D3(1+g)/(Rs-g)

               = 1.79(1+.06)/(.10-.06)

               = 1.79*1.06/.04

                = $ 47.44

d)

year	cash flow
1	1.59
2	1.69
3	1.79+47.44= 49.23

e)

Present value = [PVF10%,1*CF1]+[PVF10%,2*CF2]+[PVF10%,3*CF3]

    =[.90909*1.59]+[.82645*1.69]+[.75131*49.23]

       = 1.4455+ 1.3967+ 36.9870

       = 39.83      (difference in part b 39.75 is due to decimal places in present value factors)

**find present value factors using the formula :1/(1+i)^n or from table .