Integrated Potato chips paid a $2.00 per share dividend yesterday. You expect th

Question

Integrated Potato chips paid a $2.00 per share dividend yesterday. You expect the dividend to grow steady at a rate of 5% per year. What is the expected dividend in each of the next 3 years? (Do not round intermediate calculations. Round your answers to 2 decimal places) Current price $ What is the expected stock price 3 years from now? (Do not round intermediate calculations. Round your answer to 2 decimal places) Future price $ If your buy the stock and plan to hold it for 3 years, what payments will you receive? what is the present value of the those payments? (Leave no cells blank-be certain to enter "0" wherever required. Do not round intermediate calculations. Round your answers to 2 decimal places) If you buy the stock and plan to hold if for 3 years, what payments will you receive? What is the present value of those payments? (leave no cells blank-be certain to enter"0" wherever required. Do not round intermediate calculations. Round your answers to 2 decimal places)

Explanation / Answer

a. Expected dividend:

Year 1 = D0(1+g)^1 = 2(1+0.05)^1 = $2.10

Year 2 = D0(1+g)^2 = 2(1+0.05)^2 = $2.21

Year 3 = D0(1+g)^2 = 2(1+0.05)^3 = $2.32

b. Current Price = D0(1+g) / (Ke - g)

= 2(1.05) / (0.11 - 0.05)

= $35

c. Future price three years from now = D4 / (Ke-g)

= 2.32(1.05) / (0.11 - 0.05)

= $40.60

d.

Year 1 Year 2 Year 3 Dividend $2.10 $2.21 $2.32 Sale of stock $40.60 Total cash flow $2.10 $2.21 $42.92 PVF@11% 0.901 0.812 0.731 PV of cash flow $1.89 $1.79 $31.37

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