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 4 percent per year thereafter. If the required return on this stock is 12.5 percent, what is the current share price?

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Expert Solution

current share price is $40.76

Statement showing Current Price
Particulars	Time	PVf12.5%	Amount	PV
Cash inflows (Dividend)	10.00	0.3079	10.00	3.08
Cash inflows (Price)	10.00	0.3079	122.35	37.68
Current share price				40.76

P10= D11/ke-g
P10 = 10*1.04/(12.5%-4%)
P10 = 10.4/(8.5%)
P10 = $122.35

jeff jeffy answered 1 year ago

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