Metallica Bearings, Inc., is a young start-up company. No dividends will be paid
ID: 2651587 • Letter: M
Question
Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next seven years, because the firm needs to plow back its earnings to fuel growth. The company will then pay a dividend of $16.75 per share 8 years from today and will increase the dividend by 6.00 percent per year thereafter.
If the required return on this stock is 14.00 percent, what is the current share price? (Do not round intermediate calculations. 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 seven years, because the firm needs to plow back its earnings to fuel growth. The company will then pay a dividend of $16.75 per share 8 years from today and will increase the dividend by 6.00 percent per year thereafter.
Explanation / Answer
First 7 years Dividend 0 Next 8 years Year Dividend Present Value factor @ 14% Present Value 8 16.75 0.88 14.69 9 16.75 0.77 12.89 10 16.75 0.67 11.31 11 16.75 0.59 9.92 12 16.75 0.52 8.70 13 16.75 0.46 7.63 14 16.75 0.40 6.69 15 16.75 0.35 5.87 Total 77.70 Hence, Present Value today= 77.70*Present value factor(14%,7 years) 77.70*0.40= 31.08 Horizon Period- beyond 8 years D8= 16.75 Growth= 6% Re= 14% Hence, Present Value at the end of 8 years= D8(1+g)/ (Re-g) D8(1+g)/ (Re-g)= 16.75*1.06/ (14%-6%) 17.755/8%= 221.9375 Thus, Present Value today= 221.94*Present value factor(14%,8 years) 77.70*0.35= 77.679 Thus, the Share Price today= 31.08+77.679= 108.76