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 $11 per share annual dividend 10 years from today and will increase the dividend by 4 percent per year thereafter. If the required annual return on this stock is 12 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 $

Note: This and subsequent problems illustrate that stock prices are the present values of future cash flows. Rather than memorizing an equation for stock prices, think about valuing the cash flows. To do so, it is often useful to write out a time line keeping in mind that PV for annuity/perpetuity assumes the cash flows begin in one period, but here no payments are made for the first 9 years.

Solution

Calculation of Share price.

Year

Dividend/Cash flow

PVF@12%

PV

1-9

0

0

10

11

.386

4.246

11 & Onwards

11(1.04)/12%-4%

=143

.386

55.198

Total Value (P 0)

59.444