Storico Co. just paid a dividend of $4.50 per share. The company will increase i

Question

Storico Co. just paid a dividend of $4.50 per share. The company will increase its dividend by 12 percent next year and will then reduce its dividend growth rate by 3 percentage points per year until it reaches the industry average of 3 percent dividend growth, after which the company will keep a constant growth rate forever. If the required return on Storico stock is 12 percent, a share of stock will sell for $today. (Do not include the dollar sign ($). Round your answer to 2 decimal places. (e.g., 32.16))

Explanation / Answer

Dividends are given as follows

D0 = $4.50

D1 = 4.50*1.12

D2 = 4.50*1.12*1.09

D3 = 4.50*1.12*1.09*1.06

D4 = 4.50*1.12*1.09*1.06*1.03

D5 = 4.50*1.12*1.09*1.06*1.03^2

And so on

Total present value of these future dividends is the current stock price.

Required return = 12%

P0 = 4.50*1.12/1.12 + 4.50*1.12*1.09/1.12^2 + (4.50*1.12*1.09*1.06/(0.12 – 0.03))/1.12^2

P0 = 60.46

Intrinsic value of stock = $60.46

So, the expected price of stock today = $60.46

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