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Problem 8. (Section three) 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 3years?
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.
At the end of year 1, Div1=1*1.04=1.04
At the end of year 2, Div2=1.04*1.04=1.0816
At the end of year 3, Div3=1.0816*1.04=1.1249

b. If ...

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\$2.49