Stock V alues. Integrated Potato Chips paid a $1 per share dividend yeste r da y . You expect the

QUESTION

Stock V alues. Integrated Potato Chips paid a $1 per share dividend yeste r da y . You expect the dividend to grow steadily at a rate of 4 percent per year. a. What is the expected dividend in each of the next 3 years? b. If the discount rate for the stock is 12 percent, at what price will the stock sell? c. What is the expected stock price 3 years from now? 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? Compare your answer to (b).
Answer A Expected Dividend Year 1 Dividend at year 0 (1+growth rate) ^ 1 1(1+4%)^1 = $ 1.04 Year 2 Dividend at year 0 (1+growth rate) ^ 2 1(1+4%)^2 = $ 1.0816 Year 3 Dividend at year 0 (1+growth rate) ^ 3 1(1+4%)^3 = $ 1.124 Answer B Price = Dividend at year 1/(Rate of return less growth rate) Price = $ 1.04 /(12% less 4 %) Price = $ 13 Answer C Expected stock price 3 years from now = P(3) = Dividend at year4/(rate of retun less

wth rate) = (1*1.04^4)/(0.12-0.04) = $14.62323 Answer D The Payments that you will receive if you hold the stock for three years are = Div(1); Div(2); Div(3); P(3) = $1.04; $1.0816; $1.124864; $14.62323 PV of these cash streams = 1.04/1.12 + 1.0816/1.12^2 + (1.124864+14.62323)/1.12^3 = $13

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