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 $6 per share 15 years from today and will increase the dividend by 7 percent per year thereafter. |
If the required return on this stock is 13 percent, what is the
current share price? |
Multiple Choice
$17.16
$18.61
$18.97
$15.99
$18.07
Using DDM,
Share Price = D15/(R-G)
Price in year 14 = 6 /(0.13 - 0.07) = 100
Current Price = Price in year 14 / (1+required rate)^14
= 100 /(1+0.13)^14 = 18.07 Answer
The last option is correct.
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Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock...
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