Question

Integrated Potato Chips just paid a $2.7 per share dividend. 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.) 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.) c. What is the expected stock price 3 years from now? (Do not round intermediate calculations. Round your answer to 2 decimal places.) d. If you buy the stock and plan to sell it 3 years from now, what are your expected cash flows in (i) year 1; (ii) year 2; (iii) year 3? (Do not round intermediate calculations. Round your answers to 2 decimal places.) e. What is the present value of the stream of payments you found in part (d)? (Do not round intermediate calculations. Round your answers to 2 decimal places.) Next Visit question mapQuestion 2 of 10 Total 2 of 10 Prev

Answer 1

Answer a.

Recent Dividend, D0 = $2.70
Growth Rate, g = 6.00%

D1 = $2.70 * 1.06 = $2.86
D2 = $2.86 * 1.06 = $3.03
D3 = $3.03 * 1.06 = $3.21

Answer b.

Required Return, rs = 10%

Current Price, P0 = D1 / (rs - g)
Current Price, P0 = $2.86 / (0.10 - 0.06)
Current Price, P0 = $71.50

Answer c.

Expected Price in 3 years, P3 = P0 * (1 + g)^3
Expected Price in 3 years, P3 = $71.50 * 1.06^3
Expected Price in 3 years, P3 = $85.16

Answer d.

Cash Flow, Year 1 = D1
Cash Flow, Year 1 = $2.86

Cash Flow, Year 2 = D2
Cash Flow, Year 2 = $3.03

Cash Flow, Year 3 = D3 + P3
Cash Flow, Year 3 = $3.21 + $85.16
Cash Flow, Year 3 = $88.37

Answer e.

Present Value of Stream = $2.86/1.10 + $3.03/1.10^2 + $88.37/1.10^3
Present Value of Stream = $71.50