The Dividend Growth Model Applied to Magna Vision

MagnaVision has not yet begun to pay dividends. However, as we saw in Table 12-1, a cash dividend of $0.442 per share is forecasted for 2005. The dividend is expected to grow by about 2.5 percent in 2006, and then at a constant 5 percent rate thereafter. MagnaVision's cost of equity is 14 percent. In this situation, we can apply the noncon-stant dividend growth model as developed earlier in Chapter 5. Figure 12-3 shows that the value of MagnaVision's stock, based on this model, is $3.70 per share, which is the same as the value found using the corporate valuation model except for a rounding difference.

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