Questions
1. Integrated Potato Chips just paid a $1.2 per share dividend. You expect the dividend to grow steadily at a rate of 6% per year.
a. What is the expected dividend in each of the next 3 years? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
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Expected Dividend
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Year 1
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Year 2
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Year 3
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b. If the discount rate for the stock is 10%, at what price will the stock sell today? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
c. What is the expected stock price 3 years from now? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
d. If you buy the stock and plan to sell it 3 years from now, what are your expected cash flows in (i) year 1; (ii) year 2; (iii) year 3? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
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Year 1
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Year 2
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Year 3
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Dividend
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Sale Stock
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Total cash flow
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e. What is the present value of the stream of payments you found in part (d)? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
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Year 1
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Year 2
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Year 3
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PV of cash flow
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2. Eastern Electric currently pays a dividend of about $1.83 per share and sells for $33 a share.
a. If investors believe the growth rate of dividends is 2% per year, what rate of return do they expect to earn on the stock? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
b. If investors' required rate of return is 10%, what must be the growth rate they expect of the firm? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
3. Web Cites Research projects a rate of return of 20% on new projects. Management plans to plow back 25% of all earnings into the firm. Earnings this year will be $6 per share, and investors expect a rate of return of 15% on stocks facing the same risks as Web Cites.
a. What is the sustainable growth rate? 5%
b. What is the stock price? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
c. What is the present value of growth opportunities (PVGO)? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
d. What is the P/E ratio? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
e. What would the price and P/E ratio be if the firm paid out all earnings as dividends? (Round your answers to 2 decimal places.)