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11 Storico Co. just paid a dividend of $1.60 per share. The company will increase its dividend by 20 percent next year and th
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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

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