Homework SourseMetallica 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 $10 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 12.5 percent, what is the current share price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
| 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 4 percent per year thereafter. If the required return on this stock is 12.5 percent, what is the current share price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
Solution
Value after year 10=(D10*Growth rate)/(Required return-Growth rate)
=(10*1.04)/(0.125-0.04)=$122.3529412
Hence current share price=Future dividends*Present value of discounting factor(12.5%,time period)
=10/1.125^10+122.3529412/1.125^10
which is equal to
=$40.76(Approx).
