Please HELP!!! Stock Values. Integrated Potato Chips paid a$1 per share dividend
ID: 2770794 • Letter: P
Question
Please HELP!!! Stock Values. Integrated Potato Chips paid a$1 per share dividend yesterday. You expect the dividendto grow steadily at a rate of 4 percent per year.- What is the expected dividend in each of the next 3 years?
- If the discount rate for the stock is 12 percent, at what pricewill the stock sell?
- What is the expected stock price 3 years from now?
- If you buy the stock and plan to hold it for 3 years, whatpayments will you receive? What is the present value of thosepayments? Compare your answer to (b).
- What is the expected dividend in each of the next 3 years?
- If the discount rate for the stock is 12 percent, at what pricewill the stock sell?
- What is the expected stock price 3 years from now?
- If you buy the stock and plan to hold it for 3 years, whatpayments will you receive? What is the present value of thosepayments? Compare your answer to (b).
Explanation / Answer
Dividend (D0) = $1 pershare
Expected dividend growth rate = 4% per year
Calculating Expected dividend in each of the Next 3Years:
Dividend in First year (D1) = $1 (1+0.04) = $1.04
Dividend in Second year(D2) = $1.04 (1+0.04) = $1.0816
Dividend in Third year (D3) = $1.0816 (1+0.04) = $1.1248
Dividend in fourth year (D4) = $1.1248(1+0.04) = $1.16979
If the Discound rate for the Stock is 12%, thenCurrent Stock Price is :
= $1.04 / (0.12 – 0.04)
= $13
Stock Price (P0) = $13
Calculating Expected Stock Price 3 years fromnow:
Stock Price (P0) = D1 / (R– g)
Stock Price in the third year (P4)= D5 / (R-g)
Stock Price in the 4th year(P4) = $1.2165 / (0.12 –0.04)
Stock Price in the 4th year(P5) = $15.20