Metallica Bearings, Inc., is a young start-up company. No dividends will be paid
ID: 2757452 • 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 $16.50 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
Dividend in 9th year = 16.50
Dividend next year = 16.50(105.75%) = 17.45
By Gordon formula:
P = D1/K-g
= 17.45/(13.75-5.75)%
= $218.125 – Price at 9th year
=> 218.125/1.13759
$68.41
Current Price = $68.41