Metallica Bearings Inc is a young startup company No dividen

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 in 10 years 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? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Current share price

Solution

Value after year 10=(D10*Growth rate)/(Required return-Growth rate)

=(15*1.05)/(0.105-0.05)

=$286.3636(Approx)

Hence current share price=Future dividends*Present value of discounting factor(10.5%,time period)

=15/1.105^10+$286.3636/1.105^10

=$111.04(Approx).