Metallica Bearings, Inc., is a young start-up company. No dividends will be paid
ID: 2775353 • Letter: M
Question
Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next 10 years because the firm needs to plow back its earnings to fuel growth. The company will pay a $10 per share dividend in 11 years and will increase the dividend by 4 percent per year thereafter. NOTE: This is a growing perpetuity where the cash flows start in 11 years.
If the required return on this stock is 8 percent, what is the current share price? (Do not round your intermediate calculations.) HINT: the present value equations for an annuity and perpetuity give the value ONE period before the cash flows start, so you will need to discount an additional 10 years.
A) $119.27
B) $107.22
C) $110.01
D) $121.59
E) $115.80
Explanation / Answer
E) $115.80 Ke 8% g 4% Price at end of 10 yrs,P10 =D11/(ke-g) P10 = 10/(8%-4%) P10 = 10/4% P10 = 250 Discount Factor at end of 10 Years 0.4632 Current share price = .4632 * 250 = $115.80