Question

Storico Co. just paid a dividend of $1.85 per share. The company will increase its dividend by 24 percent next year and will then reduce its dividend growth rate by 6 percentage points per year until it reaches the industry average of 6 percent dividend growth, after which the company will keep a constant growth rate forever. If the required return on the company's stock is 14 percent, what will a share of stock sell for today? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Answer:

$33.26

Explanation:

We calculate the cashflow for each year

being

1.85 x (1 + 24%) = 2.294

2.294 x (1+18%) =

2.70692 x (1+12%) = 3.0317504

Then, we solve for the dividend grow model being the presnet value of the future cash dividends growing at 6%

$\frac{D_0(1+g)}{r-g} = PV\\\frac{D_1}{r-g} = PV$

3.0317504(1+.06) / (0.14 - 0.06) = 40.1706928

Last, we discount each one by the required return as they are ahead of time and not at present date

$\left[\begin{array}{ccc}Year&cashflow&PV\\&1.85&\\1&2.294&2.0123\\2&2.70692&2.0829\\3&3.0317504&2.0463\\3&40.1706928&27.1141\\&TOTAL&33.2556\\\end{array}\right]$