Metallica Bearings, Inc., is a young start-up company. No dividends will be paid
ID: 2759766 • 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 $10 per share dividend in 10 years and will increase the dividend by 5 percent per year thereafter. If the required return on this stock is 11.5 percent, what is the current share price? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Current share price
Explanation / Answer
First we find price at year 10 using divedend discount model
Price=next year divedend/(r-g)
=10*(1.05)/(11.5% - 5%) = 161.53$
Now discounting by 10 years to today
Current price is 161.53/1.115^10 = 54.39$