Problem:
Storico Co. just paid a dividend of $1.65 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.
Requirement:
Question: If the stock price is $42.54, what required return must investors be demanding on Storico stock?
Note: Be sure to show how you arrived at your answer.