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

Answer 1

P0 = $33.25558633 rounded off to $33.26

Step-by-step explanation:

The stock price today or the price per share today can be calculated using the discounted cash flow approach or the dividend discount model. The DDM values the stock based on the present value of the expected future dividends from the stock. In the given scenario, the price of the stock will be calculated as follows,

P0 = D1 / (1+r) + D2 / (1+r)^2 + .... + Dn / (1+r)^n +

[ (Dn * (1+G) / (r - G)) / (1+r)^n }

Where,

• D1, D2 and so on will be calculated by applying the appropriate growth rates to D0 of $1.85
• r is the required rate of return
• G is the sustainable or constant growth rate

P0 = 1.85 * (1+0.24) / (1+0.14) + 1.85 * (1+0.24) * (1+0.18) / (1+0.14)^2 +

1.85 * (1+0.24) * (1+0.18) * (1+0.12) / (1+0.14)^3 +

[ (1.85 * (1+0.24) * (1+0.18) * (1+0.12) * (1+0.06) / (0.14 - 0.06)) / (1+0.14)^3 ]

P0 = $33.25558633 rounded off to $33.26