Metallica Bearings, Inc., is a young start-up company. No dividends will be paid
ID: 2632439 • Letter: M
Question
Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next 11 years because the firm needs to plow back its earnings to fuel growth. The company will pay a $12 per share dividend in 12 years and will increase the dividend by 4 percent per year thereafter. If the required return on this stock is 11 percent, the current share price is $_____________.
Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next 11 years because the firm needs to plow back its earnings to fuel growth. The company will pay a $12 per share dividend in 12 years and will increase the dividend by 4 percent per year thereafter. If the required return on this stock is 11 percent, the current share price is $_____________.
Explanation / Answer
price
at year 11
= 12/0.11-0.04
= 171.42857
price now = 171.42857/1.11^11
= 54.39