Question

Storico Co. just paid
a dividend of $2.00 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 17 percent, what will a share of
stock sell for today? |

Answer #1

We can find the price of the stock in Year 3 since the dividend growth rate is constant after the third dividend. The price of the stock in Year 3 will be the dividend in Year 4, divided by the required return minus the constant dividend growth rate. So, the price in Year 3 will be:

P3 = $2.00(1.20)(1.15)(1.10)(1.05) / (.17 – .05) = $26.565

The price of the stock today will be the PV of the first three dividends, plus the PV of the stock price in Year 3, so:

P0 = $2.00(1.20)/(1.17) + $2.00(1.20)(1.15)/1.17^2 + $2.00(1.20)(1.15)(1.10)/1.17^3 + $26.565/1.17^3

P0 = **$22.55**

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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
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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...

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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
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