Integrated Potato Chips paid a $1.50 per share dividend yesterday. You expect the dividend to grow...

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Finance

Integrated Potato Chips paid a $1.50 per share dividendyesterday. You expect the dividend to grow steadily at arate of 6% per year.
a.
What is the expected dividend in each of the next 3 years?(Do not round intermediate calculations. Round your answersto 2 decimal places.)
Expected Dividend
  Year 1 $
  Year 2
  Year 3
b.
If the discount rate for the stock is 10%, at what price willthe stock sell today? (Do not round intermediatecalculations. Round your answer to 2 decimal places.)
  Current price $
c.
What is the expected stock price 3 years from now? (Donot round intermediate calculations. Round your answer to 2 decimalplaces.)
  Future price $
d.
If you buy the stock and plan to hold it for 3 years, whatpayments will you receive? What is the present value of thosepayments? (Leave no cells blank - be certain to enter "0"wherever required. Do not round intermediate calculations. Roundyour answers to 2 decimal places.)
d.
If you buy the stock and plan to hold it for 3 years, whatpayments will you receive? What is the present value of thosepayments? (Leave no cells blank - be certain to enter "0"wherever required. Do not round intermediate calculations. Roundyour answers to 2 decimal places.)
    Year 1     Year 2     Year 3
  Dividend $     $     $
  Sale of stock
  Total cash flow $     $     $
  PV of cash flow $     $     $

Answer & Explanation Solved by verified expert

3.6 Ratings (467 Votes)

a.Year 1 = 1.5(1.06) = $1.59

year 2 = 1.5(1.06)² = $1.6854

Year 3 = 1.5(1.06)³ = 1.7865

b.Price = Expected Dividend/(Required Rate of return – growth rate)

= 1.59/(10%-6%)

= $39.75

C.Price 3 years from now = Dividend year 4/(required return – growth rate)

= 1.7865(1.06)/4%

= $47.34

	Year 1	Year 2	Year 3
Dividend	$ 1.59	$ 1.69	$ 1.79
Sale of stock			47.34

Total cash flow	$ 1.59	$ 1.69	$ 49.13

PV of cash flow	$ 1.45	$ 1.40	$ 36.91

Total present value = $39.76

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Transcribed Image Text

Integrated Potato Chips paid a $1.50 per share dividendyesterday. You expect the dividend to grow steadily at arate of 6% per year.a.What is the expected dividend in each of the next 3 years?(Do not round intermediate calculations. Round your answersto 2 decimal places.)Expected Dividend Year 1$ Year 2 Year 3 b.If the discount rate for the stock is 10%, at what price willthe stock sell today? (Do not round intermediatecalculations. Round your answer to 2 decimal places.) Current price$ c.What is the expected stock price 3 years from now? (Donot round intermediate calculations. Round your answer to 2 decimalplaces.) Future price$ d.If you buy the stock and plan to hold it for 3 years, whatpayments will you receive? What is the present value of thosepayments? (Leave no cells blank - be certain to enter "0"wherever required. Do not round intermediate calculations. Roundyour answers to 2 decimal places.)d.If you buy the stock and plan to hold it for 3 years, whatpayments will you receive? What is the present value of thosepayments? (Leave no cells blank - be certain to enter "0"wherever required. Do not round intermediate calculations. Roundyour answers to 2 decimal places.) Year 1 Year 2 Year 3 Dividend$ $ $ Sale of stock Total cash flow$ $ $ PV of cash flow$ $ $