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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 $12 per share dividend 10 years from today and will increase the dividend by 4 percent per year thereafter. If the required return on this stock is 13 percent, what is the current share price?

Expert Solution

Current price of share= V1 + V2

V1 = Value of first stage

Dividend= $ 12

Time period (n)= 10 years

Required rate of return (k)= 13%

V1= Div/(1+k)n

= 12/(1+0.13)10

=12 * 5.426

=65.11

V2 = Value of second stage

Dividend= $ 12

Time period (n)= infinite

Required rate of return (k)= 13%

Dividend growth rate(g)= 4%

V1= Div(1+g)/(k-g)(1+k)n

=12(1.04)/(0.13-0.04)(1+0.13)10

=12.48/0.09 *0.295

=40.91

Price of share= 65.11 + 40.91 = 106.02

jeff jeffy answered 2 years ago

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Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock...

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