Question

If Magma Ventures just paid an annual dividend of $3.82 a share, expects dividends will grow 13 percent a year for the next 3 years and expects to increase the dividend by 3.2 percent annually forever thereafter. The required return is 6.4 percent. What is the price of this stock?

Answer 1

Do = 3.82 Di = 3.82 X 113 = 4.32 D2 = 4.32 X 1.13= 4.88 D3= 4,88 X 1.13= 5.51 D4 = 5.51 x 10032 = 5.69 Terminal value (P3) = Dy , Re= 6.4" / - Re-g g = 3.2 1 5.69 064-0032 17776 - stock price = 4.32 + 4.88 + (1.064) 1.064 5.51 + 177. I 6 (10064) 2 (1.064)3 4.06 + 4.31 + 152015 $ 160.52 = = rounding off carefully. Hote: check the

Answer 2

price of stock in the first three years (discounted)= 11.45

price stock after three years (discounted)= 147.7

P0= 11.45 + 147.7 = 159.15