Metallica Bearings, Inc., is a young start-up company. No dividends will be paid
ID: 2775966 • Letter: M
Question
Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next ten years, because the firm needs to plow back its earnings to fuel growth. The company will then pay a $12.30 per share dividend in year 11 and will increase the dividend by 5.25 percent per year thereafter.
If the required return on this stock is 12.75 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 ten years, because the firm needs to plow back its earnings to fuel growth. The company will then pay a $12.30 per share dividend in year 11 and will increase the dividend by 5.25 percent per year thereafter.
Explanation / Answer
Current share price = D12/Ke-g*1/(1+Ke)^11
= D11(1+0.0525)/0.1275-0.0525*1/(1+0.0525)^11
= 12.30(1.0525)/0.075*1/(1.0525)^11
= 172.61*1/(1.0525)^11
= 172.61/0.5696 i.e 303