Question

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.)

Answer 1

Given about Metallica Bearings, Inc.,

No dividends will be paid on the stock over the next 12 years

Dividend year year 13 D13 = $11

there after growth rate g = 7%

required return on this stock rs = 13

So, stock price at year 12, using constant dividend growth rate is

P12 = D13/(rs-g) = 11/(0.13-0.07) = $183.33

Stock price today is present value of price in year 12 discounted at rs

So, P0 = P12/(1+rs)^12

P0 = 183.33/1.13^12 = $42.30

Current sahre price = $42.30