Question

Integrated Potato Chips just paid a $1.4 per share dividend. 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? b. If the discount rate for the stock is 11%, at what price will the stock sell today? c. What is the expected stock price 3 years from now? d. If you buy the stock and plan to sell it 3 years from now, what are your expected cash flows in (i0) year 1; (ii) year 2; (iii) year 3? e. What is the present value of the stream of payments you found in part (d)? Complete this question by entering your answers in the tabs below. Req B and C Req A Req D Req E 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 3 Year 1 Year 2 Dividend Year b. Current price Sale of stock Year 2 c. Future price Total cash flow Year 3 Year 2 Year 3 Year 1 <Req A PV of cash flow Req B and C >

Answer 1

Expected Div:

Year	Div	CF	Formula	Calculation
1	D1	$      1.47	D0(1+g)	1.4*1.05
2	D2	$      1.54	D1(1+g)	1.47*1.05
3	D3	$      1.62	D2(1+g)	1.54*1.05

Price todAY = D1 / [ Ke - g ]

= 1.47 / [ 11% - 5% ]

= 1.47 / 6%

= 24.5

Price after 3 Years = D0(1+g)^4 / [ Ke - g ]

= $ 1.4(1+0.05)^4 / [ 11% - 5% ]

= $ 1.4(1.05)^4 / [ 6% ]

= $ 1.4* 1.2155 / [ 6% ]

= 1.7017 / 6%

= 28.36

CFs in year1,2 and 3:

Year	Div	Sale Price	CF
1	$      1.47		$      1.47
2	$      1.54		$      1.54
3	$      1.62	$   28.36	$   29.98

PV of CFs:

Year	Div	Sale Price	CF	PVF @11%	Disc CF
1	$      1.47		$      1.47	0.9009	$      1.32
2	$      1.54		$      1.54	0.8116	$      1.25
3	$      1.62	$   28.36	$   29.98	0.7312	$   21.92