Metallica Bearings, Inc., is a young start-up company. No dividends will be paid
ID: 2738608 • 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 $15 per share annual dividend 10 years from today and will increase the dividend by 5 percent per year thereafter. If the required return on this stock is 14.5 percent, what is the current share price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Explanation / Answer
D10 = 15
D11 = 15*(1.05) = 15.75
By Dividend discount model
P10 = D11/(Ke-G)
P10 = 15.75/(14.5-5)%
P10 = 165.79
By discounting it back for today present value = P10*(1+14.5%)^-10
P0 = 165.79*(1.145)^-10
P0 = 42.81