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    Stock Values

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    Stock Values. Integrated Potato Chips paid a $1 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).

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    Solution Preview

    a. What is the expected dividend in each of the next 3 years?
    You can find the expected dividend in each of the next 3 years by multiplying the dividend received in the previous period with the growth rate of 4%.
    Year 0 $1
    Year 1 $1 x 1.04 = $1.04
    Year 2 $1.04 x 1.04 = $1.08
    Year 3 $1.08 x 1.04 = $1.12

    b. If the discount rate for the stock is 12 percent, ...

    Solution Summary

    This solution is comprised of a detailed explanation to find the expected dividend in each of the next 3 years, the price of the stock, and the expected stock price 3 years from now.

    $2.19