Integrated Potato Chips paid a $2.40 per share dividend yesterday. You expect th

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 $ 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 $ $ $

Explanation / Answer

Expected dividend in each of the next 3 years

Expected Dividend

Year 1

Year 2

Year 3

$ 2.54

$ 2.69

$ 2.85

Current price of the stock can be calculated as follows:

Discount Rate (R) = (Dividends (Div) / Stock Price (P0)) + Dividend Growth Rate (G)

Stock Price = Div / (R - G)

Stock Price = 2.40/ (0.10-0.06)

Stock Price = 2.40/0.04

Stock Price = $ 60

Expected Stock Price each of the next 3 years

Expected Stock Price

Year 1

Year 2

Year 3

$ 63.50

$ 67.25

$ 71.25

Expected Dividend

Year 1

Year 2

Year 3

$ 2.54

$ 2.69

$ 2.85

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