Question

1. Stock Values. 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).

Answer 1

Answer:

Explanation:

a ) Expected dividend per share  in the next three  years :

1 ) 2 x 1.04 = 2.08

2 ) 2 x 1.08 = 2.16

3 ) 2 x 1.12 = 2.24

b )

Price of share at present  = 2.08 / (.12-.04 )

= 26

c ) Expected stock price after 3 years

= 2 x 1.16 / .08

= 29

cash inflow i year 1   :      2.08

cash inflow in year 2  :     2.16  

cash inflow in year 3        2.24  + 29  = 31.24  

Present value of cash flow

=  1.85   ,  1.72 ,  22.23

Total = 25.8

It is almost the same with that of data in ( b )