Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next 13 years because the firm needs to plow back its earnings to fuel growth. The company will pay a $13 per share dividend in 14 years and will increase the dividend by 7 percent per year thereafter. Required: If the required return on this stock is 14 percent, what is the current share price? (Do not round your intermediate calculations.)
$34.83
$32.12
$35.50
$29.66
$33.81
Answer is $33.81
Dividend in Year 14, D14 = $13.00
Growth Rate, g = 7.00%
Required Return, rs = 14.00%
Stock Price in Year 13, P13 = D14 / (rs - g)
Stock Price in Year 13, P13 = $13.00 / (0.14 - 0.07)
Stock Price in Year 13, P13 = $13.00 / 0.07
Stock Price in Year 13, P13 = $185.71429
Current Stock Price, P0 = P13 / (1 + rs)^13
Current Stock Price, P0 = $185.71429 / (1 + 0.14)^13
Current Stock Price, P0 = $33.81
Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock...
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