Metallica Bearings, Inc., is a young start-up company. No dividends will be paid
ID: 2632414 • Letter: M
Question
Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next nine years, because the firm needs to plow back its earnings to fuel growth. The company will then pay a $13.00 per share dividend in year 10 and will increase the dividend by 5.00 percent per year thereafter.
If the required return on this stock is 13.00 percent, what is the current share price? (Select rounded answers as directed, but do not use the rounded numbers in intermediate calculations.)
Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next nine years, because the firm needs to plow back its earnings to fuel growth. The company will then pay a $13.00 per share dividend in year 10 and will increase the dividend by 5.00 percent per year thereafter.
Explanation / Answer
Hi,
Please find the detailed answer as follows:
You need to calculate the present value of dividend paid in Year 10 and price at the end of Year 9 to arrive at the current stock price.
Current Stock Price = 13/(1+.13)^10 + 13*(1+.05)/(1+.13)^10*(.13 - .05) = $54.09
Option C ($54.09) is the correct answer.
Thanks.