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Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock...

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 $15 per share in 10 years and will increase the dividend by 5 percent per year thereafter. If the required return on this stock is 15 percent, what is the current share price?
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Answer #1

The dividend paid in the 10th year is $15.

So, the price of the share at the end of 9th year as per the Gordon Growth Model is :

P9 = D10/ Re - g

= $15/ 0.15 - 0.05

= $150

So, the current share price is :

FV = $150

I/Y = 15%

N= 9 Years

PV = 150/(1.15)^9

= $42.64

So, the current stock price is $42.64

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Answer #2

P after 10 yrs = 15(1.05)/0.15-0.10 = 157.5

P0 = 157.5/1.15^9 = 44.77 (approx)

answered by: Ayyas
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