Metallica Bearings, Inc., is a young start-up company. No dividends will be paid
ID: 2773754 • Letter: M
Question
Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next seven years, because the firm needs to plow back its earnings to fuel growth. The company will then pay a dividend of $16.75 per share 8 years from today and will increase the dividend by 6 percent per year thereafter. The required return on the stock is 14 percent.
What is the price of the stock 7 years from today? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
What is the current share price? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next seven years, because the firm needs to plow back its earnings to fuel growth. The company will then pay a dividend of $16.75 per share 8 years from today and will increase the dividend by 6 percent per year thereafter. The required return on the stock is 14 percent.
Explanation / Answer
1.16.75/(0.14-0.06)=16.75/0.08=209.375
2. 209.375/(1.14)^7=83.674