Question

(SOLVE WITHOUT CALCULATOR AND EXCEL)

WRITE THE DETAILED AND COMPLETE SOLUTION.

Storico Co. just paid a dividend of $3.40 per share. The company will increase its dividend by 20 percent next year and will 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.

1) If the required rate of return on Storico’s stock is 13 percent,

a. What should a share of stock sell for today?

b. What is the dividend yield? What is the expected capital gains yield?

2) Suppose the current share price is $62.40 and all the dividend information remains the same. 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).

Answer 1

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