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

Question - a

Intrinsic value = Expected dividend / ( Ke - g )

= 1.3886 / ( 0.1280 - 0.06 )

= 20.42

Expected dividend = 1.31 * ( 1.06) = 1.3886

Ke = 12.80 %

g = growth rate = 0.06

Question - b

Expected price = Current Intrinsic price * ( 1 + growth rate ) = 20.42 * ( 1.06) = 21.65

Question - c

HPY = Holding period yield = ( P1 - P0 + D1 ) // P0 * 100

= ( 21.65 - 20.42 + 1.3886 ) / 20.42 * 100 = 12.80 %

Question - d

HPY = Holding period yield = ( P1 - P0 + D1 ) // P0 * 100

= ( 21.65 - 17.70 + 1.3886 ) / 17.70 * 100 = 30.16 %