Integrated Potato Chips paid a $2 per share dividend yesterday. You expect the dividend to grow steadily at a rate of 4 percent per year. a. What is the expected dividend in each of the next 3 years? b. If the discount rate for the stock is 12 percent, at what price will the stock sell? c. What is the expected stock price 3 years from now? d. If you buy the stock and plan to hold it for 3 years, what payments will you receive? What is the present value of those payments? Compare your answer to (b).

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Step-by-step explanation:

Given that:

Dividend paid (D) = $2

Growth rate (g) = 4% per annum = 0.04

Expected Dividend in each of the next 3 years :

1st year : $2 * 1.04 = $2.08

2nd year : $2.08 * 1.04 = $2.16

3rd year: $2.16 * 1.04 = 2.2464 = $2.25

B) If the discount rate for the stock is 12 percent, at what price will the stock sell?

Discount rate (r) = 12% = 0.12

Price of stock = Dividend / (r - g)

Price of stock = 2 / (0.12 - 0.04)

Price = 2 / 0.08 = $25

c. What is the expected stock price 3 years from now?

(2.25 * 1.04) / 0.08

2.34 / 0.08 = $29.25

D) If you buy the stock and plan to hold it for 3 years, what payments will you receive? What is the present value of those payments?

Dividend to be received from year 1 to 3

2.08, 2.16, 2.25

Stock price in 3rd year = 29.25

Present value :

(29.25/1.12^3) + (2.25/1.12^3) + (2.16/1.12^2) + (2.08 / 1.12^1) = 26.00

For year 1 :

D = 2.08

Stock price = 2.16/0.08 = 27

Present value (PV) = (27/1.12) + (2.08/1.12) = 25.96

Year 2 :

D = 2.16

Stock price = 2.25/0.08 = 28.125

cashflow = (2.16 + 28.125) = 30.285

PV = (28.125/1.12^2) + (2.16/1.12^2) + (2.08/1.12^1) = 26.00

Year 3:

D = 2.25

STOCK PRICE = 29.25

Total Cashflow = (2.25 + 29.25) = 31.5

PV = (31.5/1.12^3) + (2.25/1.12^3) + (2.16/1.12^2) + (2.08/1.12^1) = $27.60

Across the Y axis and one up, I'm pretty sure!

Step-by-step explanation: