Metallica Bearings, Inc., is a young start-up company. No dividends will be paid
ID: 2616739 • Letter: M
Question
Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next 13 years because the firm needs to plow back its earnings to fuel growth. The company will pay a $13 per share dividend in 14 years and will increase the dividend by 6 percent per year thereafter.
If the required return on this stock is 13 percent, what is the current share price?
Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next 13 years because the firm needs to plow back its earnings to fuel growth. The company will pay a $13 per share dividend in 14 years and will increase the dividend by 6 percent per year thereafter.
Explanation / Answer
Value after year 14=(D13*Growth rate)/(Required return-Growth rate)
=(13*1.06)/(0.13-0.06)=$196.8571429
Hence current share price=Future dividends*Present value of discounting factor(13%,time period)
=13/1.13^14+196.8571429/1.13^14
=$37.92(Approx).