Question

# Storico Co. just paid a dividend of \$3.15 per share. The company will increase its dividend...

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)

 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)

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