In: Finance
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?
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 |