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9 July, 20:08

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: __.

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Answers (1)
  1. 9 July, 20:39
    0
    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
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