Question

Magnetic Corporation expects dividends to grow at a rate of 17% for the next two years. After two years dividends are expected to grow at a constant rate of 6.1%, indefinitely. Magnetic’s required rate of return is 11.2% and they paid a $1.65 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

	Required rate	11.20%
Year	Previous year dividend	Dividend growth rate	Dividend current year	Horizon value	Total Value	Discount factor	Discounted value
1	1.65	17%	1.9305		1.9305	1.112	1.7361
2	1.9305	17%	2.258685	46.99	49.248685	1.237	39.813
	Long term growth rate =	6%			Value of Stock =	Sum of discounted value =	41.55

Where
Discount factor=	(1+ required rate)^N
Discounted value=	total value/discount factor
Total value = Dividend	+ terminal value
Horizon value = year 2	Dividend *(1+long term gro	wth rate)/( required rate-long	term growth rate)

Dividend at end of year 1:1.93

Dividend at end of year 2:2.26

Dividend at end of year 3:= year 2 dividend*(1+long term growth rate) = 2.258*(1+0.061)=2.40

Price of stock at end of year 2= horizon value = 46.99

Price of stock today:41.55