Question

11 Storico Co. just paid a dividend of $1.60 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? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g.. 32.16.) Dints Stock price

Answer 1

To find the value of stock, we discount the expected cash flows of the stock to the present value.

Dividend for Year 1 = 1.6* (1+20% Growth) = 1.92

Year 2 = 1.92 *1.15= 2.208

Year 3 = 2.208*1.10 = 2.4288

Year 4 = 2.4288 * 1.05 = 2.5502

Value of Share at end of Year 4 using Dividend Discount Model = 2.5502 * (1+ Growth ) / (Ke - Growth)

= 2.5502* 1.05 / (17%-5%)

= 22.3146

Now we discount all tha above cash flows at present value.

DF for each year = 1 / (1+ 17%)^ N

Year	Cash Flows	DF	PV
1	1.92	0.8547	1.64
2	2.208	0.7305	1.61
3	2.4288	0.6244	1.52
4	2.55024	0.5337	1.36
4	22.3146	0.5337	11.91
			18.04

We get the value of stock as $18.04