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# 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