Stock Values. Integrated Potato Chips paid a $1 per share dividend yesterday.

Question

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?

I

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

A. Expected dividend in each of the next 3 years is = (1*1.04^1); (1*1.04^2); (1*1.04^3) = 1.04; 1.0816; 1.124864

B. Price the stock will sell at = P(0) = Div(1)/(r-g) = 1.04/(0.12-0.04) = $13

C. Expected stock price 3 years from now = P(3) = Div(4)/(r-g) = (1*1.04^4)/(0.12-0.04) = $14.62323 ==> Note: we are assuming the same dividend growth rate and discount rate

D. The Payments that you will receive if you hold the stock for three years are = Div(1); Div(2); Div(3); P(3) = $1.04; $1.0816; $1.124864; $14.62323

PV of these cash streams = 1.04/1.12 + 1.0816/1.12^2 + (1.124864+14.62323)/1.12^3 = $13

Answer 2

I was gonna do this for you, but i did your other DDM question and got that d**n Coffee Break page, so i'm gonna go thru that again for nothing.   but for A. apply growth to the dividend yearly...too easy..B.  use the Gordon's DDM model of D (1 + g) / (R - g) for stock value

C. apply growth to your answer in B.  D.  calculate the present value of your dividends and the capital gain in 3 years.  this is simple stuff,man!