Integrated Potato Chips paid a $1 per share dividend yesterday.

You expect the dividend

to grow steadily at a rate of 4% per year.

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

DIV1 = $1  1.04 = $1.04

DIV2 = $1  1.042 = $1.0816
DIV3 = $1  1.043 = $1.1249

b. If the discount rate for the stock is 12%, at what price will stock sell?

DIV1 $1.04
P0 =   $13.00
rg 0.12  0.04

c. What is the expected stock price 3 years from now?

DIV4 $1.1249  1.04

P3 =   $14.6237
rg 0.12  0.04

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 this answer to b.

The payments I will receive would be:

Year 1 Year 2 Year 3

DIV $1.04 $1.0816 $1.1249
Selling Price 14.6237
Total Cash Flow $1.04 $1.0816 $15.7486
PV of Cash Flow $0.9286 $0.8622 $11.2095
Sum of PV = $13.00, the same as the answer to part (b).