Metallica Bearings, Inc., is a young start-up company. No dividends will be paid
ID: 2621422 • Letter: M
Question
Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next ten years, because the firm needs to plow back its earnings to fuel growth. The company will then pay a dividend of $13.50 per share 11 years from today and will increase the dividend by 5.25 percent per year thereafter.
If the required return on this stock is 13.25 percent, what is the current share price?
Required:If the required return on this stock is 13.25 percent, what is the current share price?
Explanation / Answer
PRICE AT THE END OF 10TH YEAR I.e. V10 = D11/(Re-g)
V10 = 13.5/(0.1325-0.0525)
V10 = 168.75
P.V. OF THE ABOVE = 168.75/(1.1325^10)
= 48.62
THEREFORE THE ANSWER IS $48.62