Question

Storico Co. just paid a dividend of $1.90 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 15 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.)

Answer 1

Stock Price :
The price is a reflection of the company's value – what the public is willing to pay for a piece of the company. It is nothing but present value of cash flows ( Div & Sale Price of Stock at future date) from it.

Div calculation:

Year	Cash Flow / Div	Formula	Calculation
1	$                     2.28	D0 ( 1 + g)	1.9 ( 1 + 0.2 )
2	$                     2.62	D1 ( 1 + g)	2.28 * ( 1 + 0.15 )
3	$                     2.88	D2 ( 1 + g)	2.62 * ( 1 + 0.1 )
4	$                     3.03	D3 ( 1 + g)	2.88 * ( 1 + 0.05 )

Price after 3 Years:

Price of Stock is nothing but PV of CFs from it.
P3 = D4 / [ Ke - g ]
= $ 3.03 / [ 15 % - 5 % ]
= $ 3.03 / [ 10 % ]
= $ 30.28
P3 - Price after 3 years

D4 - Div after 4 Years

Ke - Required ret

g - Growth Rate

Price Today:

Year	Particulars	Cash Flow	PVF @15 %	Disc CF
1	D1	$      2.28	0.8696	$              1.98
2	D2	$      2.62	0.7561	$              1.98
3	D3	$      2.88	0.6575	$              1.90
3	P3	$   30.28	0.6575	$           19.91
Price				$           25.77

Price today is $ 25.77