Question

Storico Co. just paid a dividend of $1.30 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 11 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.) Stock price |

Answer 1

29.56

Horizon value = P3= D4/(k-g)

= 1.9734*105%/(11%-5%)

= 34.5345

Current price = D1/(1+k)+ D2/(1+k)^2 + (D3+P3) /(1+k)^3

= 1.56/1.11^1+1.794/1.11^2+(1.9734+34.5345)/1.11^3

=$29.56