Question

In: Finance

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 10 years because the firm needs to plow back its earnings to fuel growth. The company will pay a dividend of $10 per share 11 years from today and will increase the dividend by 7 percent per year thereafter.

If the required return on this stock is 14 percent, what is the current share price?

Lohn Corporation is expected to pay the following dividends over the next four years: $10, $7, $6, and $2. Afterward, the company pledges to maintain a constant 6 percent growth rate in dividends forever.

If the required return on the stock is 12 percent, what is the current share price?

Synovec Co. is growing quickly. Dividends are expected to grow at a rate of 23 percent for the next 3 years, with the growth rate falling off to a constant 6 percent thereafter.

If the required return is 11 percent and the company just paid a $1.30 dividend. what is the current share price?

Solutions

Expert Solution

Let the dividend for year n be denoted by Dn

Let required rate of return be r

Let Growth rate be g

(1) Given, D11 = 10, g = 7% and r = 14%

According to Gordon's Growth Formula,

P10 = D11/(r - g) = 10/(0.14 - 0.07) = $142.86

Hence, P0 = P10/(1+r)10 = 142.86/(1+0.14)10 = $38.54

Hence, Price of stock now = $38.54

(2) Given, D1 = 10, D2 = 7, D3 = 6, D4 = 2, g = 6%, r = 12%

According to Gordon's Growth Formula, P3 = D4/(r - g) = 2/(0.12 - 0.06) = $33.33

Hence, Price of stock now = D1/(1+r) + D2/(1+r)2 + D3/(1+r)3 + P3/(1+r)3 = 10/(1+0.12) + 7/(1+0.12)2 + 6/(1+0.12)3 + 33.33/(1+0.12)3 = $42.50

(3) Given, D0 = $1.30, g1 = 23%, r = 11% and g2 = 6%

D1 = D0(1+g1) = 1.30(1+0.23) = $1.599

D2 = D1(1+g1) = 1.599(1+0.23) = $1.967

D3 = D2(1+g1) = 1.967(1+0.23) = $2.419

D4 = D3(1+g2) = 2.419(1+0.06) = $2.564

According to Gordon's Growth Formula, P3 = D4/(r - g) = 2.564/(0.11 - 0.06) = $51.28

Hence, Price of stock now = D1/(1+r) + D2/(1+r)2 + D3/(1+r)3 + P3/(1+r)3 = 1.599/(1+0.11) + 1.967/(1+0.11)2 + 2.419/(1+0.11)3 + 51.28/(1+0.11)3 = $42.30


Related Solutions

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 $12 per share in 10 years and will increase the dividend by 6 percent per year thereafter. If the required return on this stock is 11 percent, what is the current share price?
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 6 percent per year thereafter. If the required return on this stock is 10 percent, what is the current share price? (Do not round intermediate calculations...
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?
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 $15 per share 10 years from today and will increase the dividend by 5 percent per year thereafter. If the required return on this stock is 10.5 percent, what is the current share price?
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 $11 per share in 10 years and will increase the dividend by 4 percent per year thereafter. If the required return on this stock is 12 percent, what is the current share price? (Do not round intermediate calculations and round...
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 $840 per share dividend in 10 years and will increase the dividend by 6 percent per year, thereafter. If the required return on this stock is 13 percent, what is the current share price?
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 $14 per share 10 years from today and will increase the dividend by 6 percent per year thereafter. If the required return on this stock is 14 percent, what is the current share price? (Do not round intermediate calculations and...
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 $10 per share dividend 10 years from today and will increase the dividend by 5 percent per year thereafter. If the required return on this stock is 11.5 percent, what is the current share price? (Do not round intermediate calculations and round...
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 $3.74 per share dividend 10 years from today and will increase the dividend by 4.55 percent per year thereafter. If the required return on this stock is 8.38 percent, what is the current share price?
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?
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT