Metallica Bearings, Inc., is a young start-up company. No dividends will be paid
ID: 2756281 • Letter: M
Question
Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next eight years, because the firm needs to plow back its earnings to fuel growth. The company will then pay a dividend of $14.00 per share 9 years from today and will increase the dividend by 5.75 percent per year thereafter. Required: If the required return on this stock is 13.75 percent, what is the current share price? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) Current share price $
Explanation / Answer
Lets first compute the share price at 8th year and then we will discount it to today.
As per divedend discount model current share price= Divedend next year /(Required rate of return - growth rate of divedend )
So we have price 8 years from now is 14/(13.75% - 5.75%) = 175$
Current price is 175/(1+13.75%)^8 = 62.44$
We discounted 175 to present value.