Question

Plastic Pretzels stock recently paid a dividend of $1.31 per share. The dividend growth rate is expected to be 6.00% indefinitely. Stockholders require a return of 12.80% on this stock.

a. What is the current intrinsic value of Plastic Pretzels stock? (Round your answer to 2 decimal places.)

Intrinsic value            $

b. What would you expect the price of this stock to be in one year if its current price is equal to its intrinsic value? (Round your answer to 4 decimal places.)

Expected price            $

c. If you were to buy Plastic Pretzels stock now and sell it after receiving the dividend one year from now, what would be your holding period return (HPR)? (Round your answer to 2 decimal places. Indicate negative values with a minus sign.)

HPR            %

d. If you are able to purchase the stock for $17.70 instead of its intrinsic value today, what would be the holding period return? (Round your answer to 2 decimal places. Indicate negative values with a minus sign.)

HPR            %

Answer 1

a. The value is computed as follows:

= [ Dividend paid x (1 + growth rate) ] / (rate of return - growth rate)

= [ $ 1.31 x 1.06 ] / (0.1280 - 0.06)

= $ 1.3886 / 0.068

= $ 20.42058824 or $ 20.42 Approximately

b. The price is computed as follows:

= Current price x (1 + growth rate)

= $ 20.42058824 x 1.06

= $ 21.64582353 or $ 21.65 Approximately

c. The return is computed as follows:

= (Selling price - Purchase price + dividend) / Purchase price

= ($ 21.64582353 - $ 20.42058824 +  $ 1.31 x 1.06) / $ 20.42058824

= $ 2.613835289 / $ 20.42058824

= 12.80%

d. The return is computed as follows:

= (Selling price - Purchase price + dividend) / Purchase price

= ($ 21.64582353 - $ 17.70 +  $ 1.31 x 1.06) / $ 17.70

= $ 5.33442353 / $ 17.70

= 30.14%