Question

torico 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

Answer 1

Answer:

The stock price is $33.26

Explanation:

Dividend of the year

D1 = 1.85 * 1.24

D1 = 2.294

D2 = 2.294 * 1.18

D2 = 2.70692

D3 = 2.70692 * 1.12

D3 = 3.0317504

D4 = 3.0317504 * 1.06

D4 =  3.213655424

Price at year 4 = 2.70692 * 1.12 * 1.06^2/(14%-6%)

Price at year 4 = 42.58093437

Current price = 2.294/1.14 + 2.70692/1.14^2 + 2.70692*1.12/1.14^3 + 2.70692*1.12*1.06/1.14^4 + 42.58093437/1.14^4

Current Price = $33.26

So, the stock price is $ 33.26