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Stock Values: Integrated Potato Chips

Question: 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).

Solution Preview

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?
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 = ...

Solution Summary

This solution is comprised of a detailed explanation to calculate the expected dividend in each of the next 3 years, the stock price, and the present value of payments. All calculations and steps are included.

$2.19