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Stock Value

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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 Summary

The solution explains how to calculate the value of a stock.

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Define the variables:
Pi = price at year i
P0 = today's price
Di = dividends in period i
r = market required rate of return
g = constant growth rate

a. What is the expected dividend in each of the next 3 years?

Given a growth rate g, the expected dividend in years i is:
Di = D0*(1+g)^i (D0 = $1)

D1 = $1*1.04 = $1.040
D2 = $1*1.04^2 = $1.082
D3 = $1*1.04^3 = $1.125

b. If the ...

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