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 dividend of $18 per share exactly 10 years from today and will increase the dividend by 6 percent per year thereafter. If the required return on this stock is 13 percent, what is the current share price

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Business

Amelie Roberson

25 October, 12:22

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 dividend of $18 per share exactly 10 years from today and will increase the dividend by 6 percent per year thereafter. If the required return on this stock is 13 percent, what is the current share price

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Morgan Gordon · Answer 1

The current share price $85.60

Explanation:

Share Price is the present value of all the future dividends associated with that share.

Use following formula to calculate the value of share at year 9.

Price of share at year 9 = Dividend / (Required rate of return - growth rate)

Price of share at year 9 = $18 / (13% - 6%)

Price of share at year 9 = $257.14

The Current Price of the bond can be calculated by discounting the Price of share at year 9.

Current Price = Price of share at year 9 x (1 + r) ^-n

Current Price = $257.14 x (1 + 13%) ^-9

Current Price = $85.60