Question

Storico Co. just paid a dividend of $3.85 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 13 percent, what will a share of stock sell for today?

Answer 1

Stock which we have their growth is super normal, while the dividend growth every year 1st four. Calculation of the price of the stock in year 3 since constant dividend growth rate. The stock price in year 3rd is the dividend of year 4th So the price of year 3rd is: P S3.85(.20 1.151.10)1.05) /(.13 - .05)-$76.70 The stock price of today will be the Dividend of the first three year PV plus PV of the stock price in year 3rd, so: P,-$3.85(1.20)(1.13) + $3.85(1.20)(1. Î5)(1.13)? + $3.85(1.20)(1.15)(1.10)(1.13)3 + $76.70/1.133 Po 565.45

Answer 2

Here we have a stock with differential growth, but the dividend growth changes every year for the first four years. We can find the price of the stock in Year 3 since the dividend growth rate is constant after the third dividend. The price of the stock in Year 3 will be the dividend in Year 4, divided by the required return minus the constant dividend growth rate. So, the price in Year 3 will be:

P3 = $3.85(1.20)(1.15)(1.10)(1.05) / (.13 – .05) = $76.71

The price of the stock today will be the PV of the first three dividends, plus the PV of the stock price in Year 3, so:

P0 = $3.85(1.20)/(1.13) + $3.85(1.20)(1.15)/1.132 + $3.85(1.20)(1.15)(1.10)/1.133

  + $76.71/1.133

P0 = $65.46