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

jeff jeffy answered 1 year ago

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