Question

ABC Inc., will pay no dividends over the next 13 years because the firm needs to...

ABC Inc., will pay no dividends over the next 13 years because the firm needs to retain its earnings for growth purposes. The company will pay a $6 per share dividend in 14 years and will increase the dividend by 4 percent per year thereafter.

If the required return on this stock is 9 percent, what is the current (t=0) share price?

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

No dividends will be paid on the stock over the next 13 years.Once the stock begins paying dividends, it will have a constant growth rate of dividends.

The general constant dividend growth formula is:

Pt = [Dt × (1 + g)] / (R − g)

We will use the dividend in Year 14 to find the stock price in Year 13.

P13 = D14 / (R − g) = $6 / (0.09 - 0.04) = $120

The price of the stock today is simply the PV of the stock price in the future. We simply discount the future stock price at the required return. The price of the stock today will be:

P0 = $120 / 1.09^13 = $39.14

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
ABC Inc., will pay no dividends over the next 13 years because the firm needs to...
ABC Inc., will pay no dividends over the next 13 years because the firm needs to retain its earnings for growth purposes. The company will pay an $4 per share dividend in 14 years and will increase the dividend by 4 percent per year thereafter. If the required return on this stock is 9 percent, what is the current (t=0) share price? ABC Inc. just paid a dividend of $1.75 per share. The company will increase its dividend by 28...
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 13 years because the firm needs to plow back its earnings to fuel growth. The company will pay a dividend of $13 per share 14 years from today and will increase the dividend by 5 percent per year thereafter. If the required return on this stock is 12 percent, what is the current share price?
A company plans to pay no dividends in the next 3 years because it needs earnings...
A company plans to pay no dividends in the next 3 years because it needs earnings to finance new investment projects. The firm will pay a $3.00 per share dividend in year 4 and will increase the dividend by 20% per year for the next 3 years (i.e., year 5 to year 7). After that the company will maintain a constant dividend growth rate of 6 percent per year forever. The required return on the stock is 16% per year....
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 9 years because the firm needs to plow back its earnings to fuel growth. The company will pay a $13 per share dividend in 10 years and will increase the dividend by 3 percent per year thereafter.    Required: If the required return on this stock is 6 percent, what is the current share price? (Do not round your intermediate calculations.)
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 14 years because the firm needs to plow back its earnings to fuel growth. The company will pay a $8 per share dividend in 15 years and will increase the dividend by 7 percent per year thereafter. If the required return on this stock is 11 percent, what is the current share price?
Metallic Bearings is a young start-up company. The firm plans to pay the following dividends -...
Metallic Bearings is a young start-up company. The firm plans to pay the following dividends - $9 in Year 1, $4 in Year 2 and $1 in Year 3. There will be no dividends paid on the stock over the next 9 years because the firm needs to plow back its earnings to fuel growth. The company will then pay a dividend of $17.50 per share in Year 13 and will increase the dividend by 5.5% per year thereafter. Required:...
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 12 years because the firm needs to plow back its earnings to fuel growth. The company will pay a $11 per share dividend in 13 years and will increase the dividend by 7 percent per year thereafter.    Required: If the required return on this stock is 13 percent, what is the current share price? (Do not round your intermediate calculations.)
Metallic Bearings, Inc, is a young start-up company. No dividends will be paid on the stock...
Metallic Bearings, Inc, is a young start-up company. No dividends will be paid on the stock over the next 9 years because the firm needs to plow back its earnings to fuel growth. The company will pay a dividend of $9 per share 10 years from today and will increase the dividend by 8 percent per year thereafter. If the required return on this stock is $15 per share, what is the current share price?
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 $9.4 per share dividend 10 years from today and will increase the dividend by 4.9 percent per year thereafter. If the required return on this stock is 8.96 percent, what is the current share price?
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 9 years, because the firm needs to plow back its earnings to fuel growth. The company will pay a dividend of $15.75 per share in 10 years and will increase the dividend by 4.8 percent per year thereafter. If the required return on this stock is 12 percent, what is the current share price? (Do not round intermediate calculations and round...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT