Question

Integrated Potato Chips pald a $2.30 per share dividend yesterday. You expect the dividend to grow steadily at a rate of 5% per year. a. What is the expected dividend in each of the next 3 years? (Do not round Intermediate calculations. Round your answers to 2 decimal places.) Expected Dividend Year 1 Year 2 Year 3 b. If the discount rate for the stock is 11%, at what price will the stock sell? (Do not round Intermediate calculations. Round your answer to 2 decimal places.) Current price c. What is the expected stock price 3 years from now? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Future price 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? (Leave no cells blank - be certain to enter "O" wherever required. Do not round Intermediate calculations. Round your answers to 2 decimal places.) Year 1 Year 2 Year 3 DIV Selling price Total cash flow PV of cash flow

Answer 1

a.
Calculation of expected dividend in each of the next 3 years is shown below
Year 1	$2.42	2.30*1.05
Year 2	$2.54	2.42*1.05
Year 3	$2.66	2.54*1.05
b.
Current price of stock	D1/(Ke-g)
D1 is dividend in year 1
Ke is return on equity
g is the growth rate
Current price of stock	2.42/(0.11-0.05)
Current price of stock	$40.25
c.
Future price of stock	Current price*(1+g)^n
Future price of stock	40.25*(1.05^3)
Future price of stock	$46.59
d.
	Year 1	Year 2	Year 3
DIV	$2.42	$2.54	$2.66
Selling price	0	0	$46.59
Total cash flow	$2.42	$2.54	$49.26
PV of cash flow	$2.18	$2.06	$36.02
PV of cash flow	Total cash flow*Discount factor
PV of cash flow	2.42*(1/1.11^1)	2.18
PV of cash flow	2.54*(1/1.11^2)	2.06
PV of cash flow	49.26*(1/1.11^3)	36.02