Question

Storico Co. just paid a dividend of $3.15 per share. The company will increase its dividend by 20 percent next year and then reduce its dividend growth rate by 5 percentage points per year until it reaches the industry average of 5 percent dividend growth, after which the company will keep a constant growth rate forever. If the required return on the company’s stock is 12 percent, what will a share of stock sell for today?

(Please show how to input information into the CF function of the financial calculator also)

Answer 1

	Required rate	12.00%
Year	Previous year dividend	Dividend growth rate	Dividend current year	Horizon value	Total Value	Discount factor	Discounted value
1	3.15	20%	3.78		3.78	1.12	3.375
2	3.78	15%	4.347		4.347	1.254	3.46651
3	4.347	10%	4.7817	71.726	76.5077	1.405	54.45388
	Long term growth rate =	5%			Value of Stock =	Sum of discounted value =	61.3

Where
Discount factor=	(1+ required rate)^N
Discounted value=	total value/discount factor
Total value = Dividend	+ terminal value
Horizon value = year 3	Dividend *(1+long term gro	wth rate)/( required rate-long	term growth rate)