Question

Magnetic Corporation expects dividends to grow at a rate of 13% for the next two years....

Magnetic Corporation expects dividends to grow at a rate of 13% for the next two years. After two years, dividends are expected to grow at a constant rate of 4.4%, indefinitely. Magnetic’s required rate of return is 12.2% and they paid a $2.14 dividend today. What is the value of Magnetic Corporation’s common stock per share IN TWO YEARS? (Show your answers to the nearest cent.)

Homework Answers

Answer #1
Dividend payment $                 2.14
Year Growth rate Dividend computation Dividend
1 13.00% 2.14*(1+13%) $     2.42
2 13.00% 2.4182*(1+13%) $     2.73
Current Dividend $                 2.73
Rate of return 12.20%
Growth Rate 4.40%
Share Price after 2 years =Current Dividend*(1+Growth rate)/(Rate of return-Growth Rate)
Share Price after 2 years =2.732566*(1+0.044)/(0.122-0.044)
Share Price after 2 years $               36.57
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