Question

Please show answer in excel format

Chapter 9, Fundamentals of Financial Management Storico Co. just paid a dividend of $2.65 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. If the required return on Storico stock is 12 percent, what will a share of stock sell for today?

Answer 1

Let dividend in year n be denoted by Dn

D0 = $2.65

Growth in year 1 = g1 = 20%

=> D1 = D0(1+g1) = 2.65(1+0.20) = $3.18

Growth in Year 2 = g2 = 15%

=> D2 = D1(1+g2) = 3.18(1+0.15) = $3.657

Growth in Year 3 = g3 = 10%

=> D3 = D2(1+g3) = 3.657(1+0.10) = $4.023

Growth in Year 4 = g4 = 5%

=> D4 = D3(1+g4) = 4.023(1+0.05) = $4.224

Growth rate after year 4 = g = 5%

Required return = r = 12%

According to Gordons Growth model,

P3 = D4 / (r - g) = 4.224/(0.12 - 0.05) = $60.343

P0 = D1/(1+r) + D2/(1+r)² + D3/(1+r)³ + P3/(1+r)³
= 3.18/(1+0.12) + 3.657/(1+0.12)² + 4.023/(1+0.12)³ + 60.343/(1+0.12)³
= $51.57

Hence, value of the stock now = $51.57