Storico Co. just paid a dividend of $1.75 per share. The company will increase i
ID: 2799672 • Letter: S
Question
Storico Co. just paid a dividend of $1.75 per share. The company will increase its dividend by 24 percent next year and will 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 $42.08, 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.) (Do not round intermediate calculations and round your final answer to 1 decimal place. (e.g., 32.16)) Required return %
Explanation / Answer
42.08=(1.75*1.24)/(1+r)^1+(1.75*1.18)/(1+r)^2+(1.75*1.12)/(1+r)^3+((1.75*1.06)/(r-6%))/(1+r)^3
use hit and trial method
from there we get r=9.80% is required return must investors be demanding on Storico stock
the above is the answer.