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.) Expected Dividend Year 1 Year 2 Year 3
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.) Current price
c. What is the expected stock price 3 years from now? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Future price
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.) Year 1 Year 2 Year 3 Dividend Sale Stock Total cash flow
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.) Year 1 Year 2 Year 3 PV of cash flow
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.) Rate of return 7.66 %
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.) Growth rate %
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.) Price P/E ratio.