Metallica Bearings, Inc., is a young start-up company. No dividends 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 $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 $

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Expert Solution

No dividends will be paid on the stock over the next nine years. Once the stock begins paying dividends, it will have a constant growth rate of dividends.

P_t = [D_t × (1 + g)] / (R − g)

The price of the stock in Year 9 will be:

P₉ = D₁₀ / (R − g) = $10 / (0.10 − 0.06) = $250

The price of the stock today will be:

P₀ = $250 / 1.10^9 = $106.02

jeff jeffy answered 1 year ago

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