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What is the expected dividend in each of the next three years

Integrated Potato Chips paid a $1 per share dividend yesterday. You expect the dividend to grow steadily at a rate of 4 percent year.

A. What is the expected dividend in each of the next three 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).

Solution Preview

A:
Dividend in year 1:=Current dividend * (1+growth rate)=1.00*(1+4%)=$1.04
Dividend in year 2:= Dividend in year 1* (1+growth rate)=1.04*(1+4%)=$1.0816
Dividend in year 3:== Dividend in year 2* ...

Solution Summary

Computations given in "long hand" (formula written out) rather than in Excel or with a financial calculator.

$2.19