Metallica Bearings, Inc., is a young start-up company. No dividends will be paid
ID: 2826967 • 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 10.5 percent, what is the current share price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Current share priceExplanation / Answer
Value after year 10=(D10*Growth rate)/(Required return-Growth rate)
=(15*1.05)/(0.105-0.05)
=$286.3636(Approx)
Hence current share price=Future dividends*Present value of discounting factor(10.5%,time period)
=15/1.105^10+$286.3636/1.105^10
=$111.04(Approx).