Question

Plastic Pretzels stock recently paid a dividend of $1.39 per share. The dividend growth rate is expected to be 3.60% indefinitely. Stockholders require a return of 11.60% on this stock.

a. What is the current intrinsic value of Plastic Pretzels stock? (Round your answer to 2 decimal places.)
Intrinsic Value:
b. What would you expect the price of this stock to be in one year if its current price is equal to its intrinsic value? (Round your answer to 4 decimal places.)
Expected Price:
c. If you were to buy Plastic Pretzels stock now and sell it after receiving the dividend one year from now, what would be your holding period return (HPR)? (Round your answer to 2 decimal places.)
HPR: __.

Answer 1

a. Po = Do(1+g)/Ke - g

Po = 1.39(1+0.036)/0.1160-0.036

Po = $18.00

b, Price in 1 year's time

P1 = Po(1+g)

P1 = $18(1+0.036)

P1 = $18(1.036)

P1 = $18.6480

Holding period return = P1 - Po + D1/Po x 100

Holding period return = $18.6480 - $18.00 + $1.44004/18 x 100

Holding period return = $2.08804/18 x 100

Holding period return = 11.60%

D1 = Do(1+g)

D1 = $1.39(1+0.036)

D1 = $1.44004

Explanation: The current intrinsic value of a stock is equal current dividend paid multiplied by 1 + growth rate divided by the difference between the required return and growth rate.

The price in 1 year's time is equal to current market price multiplied by 1 + growth rate