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Metallica Bearings, Inc
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 dividend of $13 per share 15 years from today and will increase the dividend by 6 percent per year thereafter. If the required return on this stock is 11 percent, what is the current share price? Multiple Choice 0 $57.30 0 $63.33 O $62.13 O $60.32 0 $54.34
Expert Solution
Dividend at the end of 15 years = 13.00
Required rate = 11%
Growth rate = 6%
Terminal value of dividend at end of Year 14 = D15/(R-G)
= 13.00/(11% -6%)
= 260.00
Present value of terminal value today = Terminal value at end of Year 14 / (1+Required rate)^14
= 260.00/(1+11%)^14
= 60.32
Correct choice D
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