Metallica Bearings, Inc., is a young start-up company. No dividends will be paid
ID: 2650619 • 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 pay a $11 per share dividend in 10 years and will increase the dividend by 4 percent per year thereafter. If the required return on this stock is 12 percent, what is the current share price? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Current share price
The next dividend payment by Blue Cheese, Inc., will be $1.56 per share. The dividends are anticipated to maintain a growth rate of 4 percent forever. The stock currently sells for $29 per share.
What is the dividend yield? (Round your answer to 2 decimal places. (e.g., 32.16))
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 pay a $11 per share dividend in 10 years and will increase the dividend by 4 percent per year thereafter. If the required return on this stock is 12 percent, what is the current share price? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Explanation / Answer
Answer - 1 : Metallica Bearings, Inc Current share price calculation
P9 ( Share price at the end of 9 years ) = D10 / (r-g).....................Applying Gordon Growth model
D10 = Dividend in 10th year = 11
r = 12 %
g = 4 %
P9 = 11 / (0.12-0.04) = 137.5
P0 (Current Share price) = P9 / (1+r)9
= 137.5 / (1+ 0.12)9
= $ 49.58
Answer - 2 : Blue Cheese, Inc. Current share price calculation
Dividend Yield = D1 / P0
D1 = 1.56
P0 = 29
Dividend Yield = 1.56 / 29 = 0.0538
Dividend Yield = 5.38 %
Capital Gains Yield = ( P1 - P0) / P0
From Gordon Growth model :
29 = 1.56 / (r - 0.04 )
r = Required rate of return = 0.0538 + 0.04 = 0.0938
r = 9.38 %
P1 = D2 / (r-g)
P1 = 1.56 * 1.04 / ( 0.0938 - 0.04) = 30.16
So captial gains yield = ( 30.16 - 29 ) / 29 = 0.04
= 4 % , which is equal to the 4 % dividend growth rate