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Use the sub navigation below to navigate within this series of questions. 28.value: 2.00 points Integrated Potato Chips paid a $1.60 per share dividend yesterday. You expect the dividend to grow steadily at a rate of 4% 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 12%, at what price will the stock sell? (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.) Year 1 Year 2 Year 3 DIV $ $ $ Selling price -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Total cash flow PV of cash flow

Explanation / Answer

We have D0=1.60, growth g=4%, a. What is the expected dividend in each of the next 3 years? Expected Dividend Year 1: D1 = Do*(1+g) = 1.60*(1+4%) = $1.66 Year 2: D2 = D1*(1+g) = 1.66*(1+4%) = $1.73 Year 3: D3 = D2*(1+g) = 1.73*(1+4%) = $1.80 -------------------------------------------------------------------------------- b. If the discount rate for the stock is 12%, at what price will the stock sell? If Ks=12%, Price P0 = D1/(Ks-g) = 1.66/(12%-4%) = 20.75 c. What is the expected stock price 3 years from now? Using Constant Growth model, at Y3, P3= D4/(Ks-g) = D3*(1+g)/(Ks-g) We also Knwo that Dn = D0*(1+g)^n So P3 = 1.80*(1+4%)/(12%-4%) = 23.40 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? We will Rx D1 of $1.66, D2 = 1.73 & D3 = 1.80 & On Sale in Y3, P3=23.40 So PV = D1/(1+Ks)^1 + D2/(1+Ks)^2 + D3/(1+Ks)^3 + P3/(1+Ks)^3 ie PV = 1.66/(1+12%)^1 + 1.73/(1+12%)^2 + 1.80/(1+12%)^3 + 23.40/(1+12%)^3 ie PV of CF = 20.80

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