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?

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 11 months ago

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...

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Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock...

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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 $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?

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Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock...

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