I need this answered ASAP!! Please
Integrated potato chips paid a $1 per share dividend yesterday. You
expect the divident to grow steadily at a rate of 4 percent per year.
a. what is the expected dividened in each of the 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
to b.

#2
data on two stocks.,both of which have discount rate of 15 percent.
                    stock a   stock b
return on equity     15%      10%
earning pershare     $2.00    $1.50
dividends per share  $1.00    $ 1.00 
what are the dividened payout ratios for each firm?
what are the expected dividened growth rates for each firm
what is th eproper stock price for each firm?

Hi niecy35!!

Exercise #1:

I start defining the variables:

Pi = price at year i
P0 = today's price
Di = dividends in period i
r = market required rate of return
g = constant growth rate


a. what is the expected dividened in each of the (next?) 3 years?

Given a growth rate g, the expected dividend in years i is:
Di = D0*(1+g)^i        (D0 = $1)

D1 = $1*1.04 = $1.040
D2 = $1*1.04^2 = $1.082
D3 = $1*1.04^3 = $1.125



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

P0 = D1 / (r-g) = 
   = $1.04 / (0.12-0.04) =
   = $1.04 / 0.08 =
   = $13



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

We know that 
Pi = D_(i+1) / (r-g) 
and 
D_(i+1) = Di*(1+g) 

Then:
D4 = D3*(1+g) =
   = $1.125*1.04 =
   = $1.17

Then:
P3 = D4 / (r-g) = 
   = $1.17 / (0.12-0.04) =
   = $1.17 / 0.08 =
   = $14.62



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
to b.

Payments = D1 + D2 + D3 =
         = $1.040 + $1.082 + $1.125 =
         = $3.247

         D1             D2             D3        
PV  = ---------  +  ----------  +  ----------  =
      (1 + r)^1      (1 + r)^2	    (1 + r)^3   

    = $1.04/(1.12) + $1.082/(1.12)^2 + $1.125/(1.12)^3 =
    = $2.592

The present value of the first 3 years cover almost the 20% of the
stock value. As farter off in the time is a payment less worth it has
in the present, this is why the 3 first payments cover 1/5 of the
total stock value. It will take more time to comprise another 20% (at
least the next 4 years).

        ----------------------------------------

Exercise #2:

                            Stock A     Stock B

Return of Equity (ROE)         15%         10%
Earnings Per Share (EPS)      $2.00      $1.50
Dividends Per Share (DPS)     $1.00      $1.00 


- what are the dividened payout ratios for each firm?

Recall that 
DPR = DPS / EPS 

-stock a:
DPR = $1.00/$2.00 = 0.5 = 50%

-stock b:
DPR = $1.00/$1.50 = 0.6667 = 66.67%



- what are the expected dividend growth rates (g) for each firm?

g = ROE * Retention rate

The retention rate is one minus the firm?s dividend payout ratio, then:

g = ROE * (1-DPR) =
  
-stock a:

g = ROE * (1-DPR) =
  = 0.15 * 0.5 =
  = 0.075

g = 7.5%


-stock b:

g = ROE * (1-DPR) =
  = 0.1 * 0.333 =
  = 0.0333

g = 3.33%



- what is the proper stock price for each firm?

P = D1 / (r-g) = DPS*(1+g) / (r-g)

-stock a:

P = DPS*(1+g) / (r-g) =
  = $1.00*1.075 / (0.15-0.075) =
  = $1.075 / 0.075 =
  = $14.33


-stock b:

P = DPS*(1+g) / (r-g) =
  = $1.00*1.0333 / (0.15-0.0333) =
  = $1.0333 / 0.1167 =
  = $8.85

 
-------------------------------------------------------

I hope that this helps you. Feel free torequest for a clarification if you need it.

Regards.
livioflores-ga

-stock b:

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