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) |

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reaches the industry average of 5 percent dividend growth, after
which the company will keep a constant growth rate forever. If the
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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
stock price is $54.50, what required return must investors be
demanding on the company's stock? (Hint: Set up the valuation
formula with...

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
stock price is $54.50, what required return must investors be
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