Storico Co. just paid a dividend of $1.65 per share. The company will increase i

ID: 2701938 • Letter: S

Question

Storico Co. just paid a dividend of $1.65 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 Storico stock is 10 percent, what will a share of stock sell for today? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Explanation / Answer

Answer: $59.72

Explanation:

Here we have a stock with supernormal growth, but the dividend growth changes every year for the first four years. 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 = $1.65(1.24)(1.18)(1.12)(1.06) / (.10 - .06) = $71.65

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 = $1.65(1.24)/(1.10) + $1.65(1.24)(1.18)/1.10^2 + $1.65(1.24)(1.18)(1.12)/1.10^3 + $71.65/1.10^3

P0 = $59.72

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Storico Co. just paid a dividend of $1.60 per share. The company will increase i

Storico Co. just paid a dividend of $1.65 per share. The company will increase i

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Storico Co. just paid a dividend of $1.65 per share. The company will increase i

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