Question

Magnetic Corporation just experienced a technological breakthrough in one of its primary divisions and expects dividends to grow at a rate of 10.8% for the next two years. After two years, dividends are expected to grow at a constant rate of 3.7%. Magnetic’s required rate of return is 9.7% and their upcoming dividend is expected to be $2.03. What is the value of Magnetic Corporation’s common stock?

Answer 1

present value factor = 1 /(1+r)^n

r =9.7%

=>0.097.

year	cash flow	PV factor	cash flow * PV factor
1	2.03	1/(1.097)^1=>0.91157703	1.85050137
2	2.03+10.8%=>2.24924	1/(1.097)^2=>0.83097268	1.86905699
2	38.87	1/(1.097)^2=>0.83097268	32.2999081
		value of common stock	36.02

working :

value at end of year 2 = year 2 dividend*(1+ growth rate) / (ke - g)

=>2.24924 *(1.037) / (0.097-0.037)

=>$38.87.