Question 6 of 17 100 points Metallica Bearings Inc Is a you

Question 6 (of 17) ? 1.00 points Metallica Bearings, Inc., Is a young start-up company. No dividends will be paid on the stock over the next 8 years because the firm needs to plow back its earnings to fuel growth. The company will pay a $10 per share dividend in 9 years and will increase the dividend by 8 percent per year thereafter Required It the required return on this stock is 14 percent, what is the current share price? (Do not round your intermediate calculations.) O $61.35 O $5843 O $5125 O $55.51 O $6018 References eBook & Resources MacBook Air F5 6 2 4

Solution

b.58.43.

the value at the end of 8 th year can be known using dividend growth formula,...(since dividends are paid from year 9 and are constantly growing then onwards).

=> price at end of year 8 = dividend at end of year 9 / (required return - growth rate)

=> $10 / (0.14 - 0.08)

=>$166.67.

now,

current price = price at end of year 8 * present value factor for 8th year @14%.

=>$166.67 * 1 / (1.14)^8............(present value factor = 1 / (1+r)^n , here, r =14% =>0.14, n = 8years).

=>$166.67 * 0.350559

=>$58.43.......(rounded to two decimals)