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.)
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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