Metallica Bearings, Inc., is a young start-up company. No dividends will be paid
ID: 2813234 • 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 dividend of $15 per share in 10 years and will increase the dividend by 5 percent per year thereafter. If the required return on this stock is 14.5 percent, what is the current share price? (Do not round intermediate calculations and 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 nine years, because the firm needs to plow back its earnings to fuel growth. The company will pay a dividend of $15 per share in 10 years and will increase the dividend by 5 percent per year thereafter. If the required return on this stock is 14.5 percent, what is the current share price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Explanation / Answer
Value after year 9=(D9*Growth rate)/(Required return-Growth rate)
=(15*1.05)/(0.145-0.05)=$165.7894737
Hence current share price=Future dividends*Present value of discounting factor(14.5%,time period)
=15/1.145^10+165.7894737/1.145^10
which is equal to
=$46.68(Approx).