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).
Dividend in year 1 = 1.00*(1+4%)=$1.04
Dividend in year 2 = 1.04*(1+4%)=$1.0816
Dividend in year 3 = 1.0816*(1+4%)=$1.124864
Calculations shown in detail.