Week 10
Stock Valuation
1. Stock Values. Integrated Potato Chips paid a $2 per share dividend yesterday. You expect the
dividend to grow steadily at a rate of 4 percent per year.
a. What is the expected dividend in each of the next 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 your answer to (b).
2. The DAP Company has decided to make a major investment. The investment will require a
substantial early cash out-flow, and inflows will be relatively late. As a result, it is expected that
the impact on the firm's earnings for the first 2 years will be a negative growth of 5% annually.
Further, it is anticipated that the firm will then experience 2 years of zero growth after which it
will begin a positive annual sustainable growth of 6%. If the firm's cost of capital is 10% and its
current dividend (D0) is $2 per share, what should be the current price per share?