Storico Co. just paid a dividend of $1.95 per share. The company will increase its dividend...

Storico Co. just paid a dividend of $1.95 per share. The company will increase its dividend by 24 percent next year and then reduce its dividend growth rate by 6 percentage points per year until it reaches the industry average of 6 percent dividend growth, after which the company will keep a constant growth rate forever. If the stock price is $40.95, what required return must investors be demanding on the company's 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.)

Expert Solution

In this question we set up first the valuation formula for all the relevant cash flows and discount them at the rate of return to get the present value and equate it with the given stock price.

Hence using the valuation formula by discounting all the cash flows to present value and using trail and error method we get the rate of return as 13%

jeff jeffy answered 2 years ago

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