Metallica Bearings, Inc., is a young start-up company. No dividends will be paid
ID: 2757418 • 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 $12 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?
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 $12 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?
Explanation / Answer
current share price = 150*.3606 54.09 P9 = D10/(ke-g) Where P9 is the price after 9 Years Ke is the required return 12.00% g is the growth rate 4.00% D10 is dividend at end of year 10 12 P9 = 12/(12%-4%) P9 = 12/8% P9=150 current share price = 150*.3606 54.09 Time PVF @12% 1.00 0.8929 2.00 0.7972 3.00 0.7118 4.00 0.6355 5.00 0.5674 6.00 0.5066 7.00 0.4523 8.00 0.4039 9.00 0.3606