Question

Metal Bearings, Inc. just paid a dividend of $1.08 on its stock. The dividends are expected to grow 19.2% per year for the next three years and then level off to a growth rate of 5.6% indefinitely. If the required return is 14.3%, what is the stock price today?

Answer 1

Last Dividend, D0 = $1.08

Growth rate for next 3 years is 19.20% and a constant growth rate (g) of 5.60%

D1 = $1.0800 * 1.1920 = $1.2874
D2 = $1.2874 * 1.1920 = $1.5346
D3 = $1.5346 * 1.1920 = $1.8292
D4 = $1.8292 * 1.0560 = $1.9316

Required Return, rs = 14.30%

P3 = D4 / (rs - g)
P3 = $1.9316 / (0.1430 - 0.0560)
P3 = $1.9316 / 0.0870
P3 = $22.2023

P0 = $1.2874 / 1.1430 + $1.5346 / 1.1430^2 + $1.8292 / 1.1430^3 + $22.2023 / 1.1430^3
P0 = $18.39

So, stock price today is $18.39