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 6 percent per year thereafter. If the required return on this stock is 11 percent, what is the current share price?

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Expert Solution

The question is solved using dividend discount model.

The question is solved by first calculating the price of the stock 9 years from today.

Price of the stock in year 9 =Dividend in year 10/(r-g)

where:

r=interest rate

g=firm’s expected growth rate

Price of the stock in year 9 = $10/ 0.11 – 0.06

= $10/ 0.05

= $200

Current stock price= $200/ 1.11^9

= $200/ 2.5580

= $78.1861 $78.19.

In case of any query, kindly comment on the solution.

jeff jeffy answered 8 months ago

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