Metallica Bearings, Inc., is a young start-up company. No dividends will be paid
ID: 2822702 • 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 $10 per share exactly 10 years from today and will increase the dividend by 6 percent per year thereafter. If the required return on this stock is 10 percent, what is the current share price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Current share price $
Explanation / Answer
value at the end of 9 years = 10/(0.1 - 0.06) = 250
current share price = 250/1.1^9 = 106.02