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Homework answers / question archive / Metallica Bearings, Inc
Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next 7 years because the firm needs to plow back its earnings to fuel growth. The company will pay a $11.93 per share dividend in 8 years and will increase the dividend by 0.04 per year thereafter. If the required return on this stock is 0.09, what is the current share price? Answer with 2 decimals (e.g. 45.45).
Current price of share is $130.52
Step-by-step explanation
Current price of year 7 is computed using the equation given below:
Current price = Expected dividend of year 8 ÷ {Required rate - Growth rate}
= $11.93 ÷ {0.09 - 0.04}
= $11.93 ÷ 0.05
= $238.60
Current price of today is computed using the equation given below:
Current price = Price at year 7 ÷ (1 + r) n
= $238.60 ÷ (1 + 0.09) 7
= $238.60 ÷1.82803912081
= $130.52237082
Hence, the current price of share is $130.52
