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Nonconstant Growth This one’s a little harder. Suppose the current share price for the firm in the previous problem is $78.43 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.)

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Answer #1

Determination of required rate of return the investors demand:

Investors will require a return that equates the present value of dividends with the current stock price. It is given that the dividends are $3.85 the growth rate will vary and have the stock price of $78.43.

Now equate the present value of stock with the discounted dividends to calculate the required rate of return as below:

By solving the equation, the required rate of return is 11.69%.

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