Question

Integrated potato chips expects to pay $1.785 per share dividend next year. You expect the dividend to grow steadily at a rate of 5% per year. If the discount rate for the stock is 11%, at what price will the stock sell today?

Answer 1

Using the Gordon Growth Model, the stock of Integrated Potato Chips with a future dividend of $1.785, a dividend growth rate of 5%, and a discount rate of 11% will sell for $29.75 today.

Step-by-step explanation:

To calculate the price at which the stock of Integrated Potato Chips will sell today given a $1.785 per share dividend next year, a constant growth rate of 5% per year, and a discount rate of 11%, we will use the Gordon Growth Model (also known as the Dividend Discount Model, DDM).

The DDM formula to find the present value of the stock is P = D / (r - g), where P is the current stock price, D is the dividend next year, r is the required rate of return (discount rate), and g is the growth rate of the dividends.

Plugging in the values: P = 1.785 / (0.11 - 0.05) = 1.785 / 0.06 = 29.75. Therefore, the stock would sell today at $29.75. The price of the stock today reflects the present value of all future dividend payments discounted back to the current period at the required rate of return.