Question

Magnetic Corporation expects dividends to grow at a rate of 14.7% for the next two years. After two years dividends are expected to grow at a constant rate of 3.8%, indefinitely. Magnetic's required rate of return is 14.6% and they paid a $1.43 dividend today, what is the value of Magnetic Corporation's common stock per share? (Show your answers to the nearest cent) Dividend at end of year 1 Dividend at end of year 2: Dividend at end of year 3 Price of stock at end of year 2: Price of stock today:

Answer 1

Answer:

D0 = $1.43

Growth rate for next 2 years is 14.70%, followed by a constant growth rate (g) 3.80%

D1 = $1.430 * 1.1470 = $1.640 or $1.64
D2 = $1.640 * 1.1470 = $1.881 or $1.88
D3 = $1.881 * 1.0380 = $1.952 or $1.95

Required Rate of Return, r = 14.60%

P2 = D3 / (r - g)
P2 = $1.952 / (0.1460 - 0.0380)
P2 = $18.074 or $18.07

P0 = $1.640/1.1460 + $1.881/1.1460^2 + $18.074/1.1460^2
P0 = $16.63