Question

Integrated Potato Chips paid a $2.40 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	$ 2.54
Year 2	$ 2.69
Year 3	$ 2.85

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	$		$		$

Answer 1

Answer 1
(Hint: Do not round intermediate calculations)
	Expected Dividend	Remarks
Year 1	$       2.54	2.40*1.06
Year 2	$       2.70	2.40*1.06*1.06
Year 3	$       2.86	2.40*1.06*1.06*1.06
Answer 2
Dividend at year 3 (2.40*1.06*1.06*1.06*1.06)		$             3.03
Divided by: Rate (10%-6% = 4%)		0.04
Terminal value		$           75.75
	Cash flow	PV factor @ 10%
Year 1	$       2.54	0.90909	$       2.31
Year 2	$       2.70	0.82645	$       2.23
Year 3	$       2.86	0.75131	$       2.15
Terminal value	$    75.75	0.75131	$    56.91
Current price			$    63.60
Answer 3
Future Price (or Terminal value)			$    75.75
Answer 4
	Year 1	Year 2	Year 3
Dividend	$       2.54	$             2.70	$       2.86
Sale of Stock			$    75.75
Total Cash Flow	$       2.54	$             2.70	$    78.61
Multiply: PV factor @ 10%	0.90909	0.82645	0.75131
PV of Cash Flow	$       2.31	$             2.23	$    59.06
Total PV of Cash Flow			$    63.60