Share
Explore BrainMass

Integrated Potato Chips and Constant-Growth Model

10.
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.

1. What is the expected dividend in each of the next 3 years?
2. If the discount rate for the stock is 12 percent, at what price will the stock sell?
3. What is the expected stock price 3 years from now?
4. 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).

19.
Constant-Growth Model. Here are data on two stocks, both of which have discount rates of 15 percent:

Stock B (the second column)
Stock A
Return on equity 15% 10%
Earnings per share $2.00 $1.50
Dividends per share $1.00 $1.00

1. What are the dividend payout ratios for each firm?
2. What are the expected dividend growth rates for each firm?
3. What is the proper stock price for each firm?

Solution Preview

10.
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.

1. What is the expected dividend in each of the next 3 years?
Year 1 $1(1.04) = $1.04
Year 2 $1.04(1.04) = $1.08
Year 3 $1.08(1.04) = $1.12
2. If the discount rate for the stock is 12 percent, at what price will the stock sell?
We can find the appropriate stock price by using the following equation.

P = D0(1 + g) where D0 is the dividend this year
(k - g) k is the required rate of return
g is the growth rate

P = 1(1 + 0.04)
(0.12 - 0.04)

P = $13
3. What is the expected stock price 3 years from now?
P = 1.12(1 + 0.04)
(0.12 - ...

Solution Summary

This solution is comprised of a detailed explanation to answer what is the expected dividend in each of the next 3 years, the stock price, the expected stock price 3 years from now, the dividend payout ratios for each firm, the expected dividend growth rates for each firm, and the proper stock price for each firm.

$2.19