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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?

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Answer #1

No dividends will be paid on the stock for 9 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)

P9 = D10 / (R − g) = $9 / (0.15 − 0.08) = $128.57

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 = $128.57 / 1.15^9 = $36.55

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