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: __.

Question

Business

Rowan Savage

16 October, 14:53

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: __.

+3

Answers (1)

Know the Answer?

Charlie Townsend · 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