Metallica Bearings, Inc., is a young start-up company. No dividends will be paid
ID: 2696158 • 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 $14.25 per share dividend in year 8 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?
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 $14.25 per share dividend in year 8 and will increase the dividend by 6.00 percent per year thereafter.
Explanation / Answer
P= 14.25x1.06/(.14-.06)1.14^8
= $66.1899 or $66.19