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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 dividend of $20 per share 10 years from today and will increase the dividend by 4 percent per year thereafter. If the required return on this stock is 10 percent, what is the current share price?

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Expert Solution

Required rate= 10.00%
Year Previous year dividend Dividend growth rate Dividend current year Horizon value Total Value Discount factor Discounted value
1 0 0.00% 0 0 1.1 0
2 0 0.00% 0 0 1.21 0
3 0 0.00% 0 0 1.331 0
4 0 0.00% 0 0 1.4641 0
5 0 0.00% 0 0 1.61051 0
6 0 0.00% 0 0 1.771561 0
7 0 0.00% 0 0 1.9487171 0
8 0 0.00% 0 0 2.14358881 0
9 0 0.00% 0 0 2.357947691 0
10 0 0.00% 20 346.667 366.667 2.59374246 141.366
Long term growth rate (given)= 4.00% Value of Stock = Sum of discounted value = 141.37
Where
Total value = Dividend + horizon value (only for last year)
Horizon value = Dividend Current year 10 *(1+long term growth rate)/( Required rate-long term growth rate)
Discount factor=(1+ Required rate)^corresponding period
Discounted value=total value/discount factor

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