Metallica Bearings, Inc., is a young start-up company. No dividends will be paid
ID: 2621864 • Letter: M
Question
Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next 10 years because the firm needs to plow back its earnings to fuel growth. The company will pay a $12 per share dividend in 11 years and will increase the dividend by 7 percent per year thereafter.
If the required return on this stock is 11 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 10 years because the firm needs to plow back its earnings to fuel growth. The company will pay a $12 per share dividend in 11 years and will increase the dividend by 7 percent per year thereafter.
Explanation / Answer
Hi,
Please find the answer as follows:
Current Stock Price = 12*(1+7%)/(11%-7%)*(1+11%)^11 = 101.85
Answer is 101.85.
Thanks.