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Metallica Bearings, Inc., is a young start-up company. Nodividends will be paid on the stock...

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 $17 per share 10 years from today and will increase the dividend by 3.9 percent per year thereafter. If the required return on this stock is 12.5 percent, what is the current share price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

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Expert Solution

Ans:- As per the dividend growth model Current Price(P0) is calculated by D1 / (rs - g), where D1 is the next dividend to be paid, rs is the required rate of return and g is the growth.

Since the dividend is paid by the company at year 10, so the share price of the firm at year 9 as per the dividend discount model will be $17 / (12.5% - 3.9%) = $197.67.

Now Present Value of the share price = Future Value / (1+r)^n, where r is the rate of return and n is the number of years

= $197.67 / (1+12.5%)^9 =$68.48.

Therefore. the current price of the share is $68.48.(approx).


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