Storico Co. just paid a dividend of $1.55 per share. The company will increase i

Question

Storico Co. just paid a dividend of $1.55 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 stock price is $27.28, what required return must investors be demanding on Storico stock? (Hint: Set up the valuation formula with all the relevant cash flows, and use trial and error to find the unknown rate of return.) (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Required return %

Explanation / Answer

Cash Flows for the cooming years from the stock.

To find out the rate of interest internally we should use IRR formula of hit and trial method.

We can also calculate it with the help of financial calculator.

To find out the IRR with financial calculator, use the following step.

Step 1: Clear memory

Step 2: Enter the Current Stock Price of 27.28 as CF0

Step 2: Enter the cash flows of all the three yearss as CF1, CF2, and CF3.

In year four the growth rate is stabilised at 6%, hence here we calculate the terrminal value. Hence the terminal value is the fourth year CF4

Now Press IRR button andd then Press CPT.

You will get an IRR of 20.37%.

In case of any clarification do buzz me.

Thanks.

Cash Flows for coming years Year Growth rate Cash Flows Formula Year 1 24% 1.922 =1.55*1.24 Year 2 18.00% 2.26796 =E6*1.18 Year 3 12.00% 2.540115 =E7*1.12 Terminal Value 6.00% 47.56789 =(E8*1.06)+((E8*1.06)/0.06)

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