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

Question

Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next eleven years, because the firm needs to plow back its earnings to tuel growth. The company will then pay a dividend of $12.50 per share 12 years from today and will increase the dividend by 5.5 percent per year thereafter If the required return on this stock is 13.5 percent, what is the current share prce? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g.. 32.16.) Current share price S eBook &Resources;

Explanation / Answer

According to dividend-discount model,

P0 = D1/(R-G)

P0 = Current stock price

D1 - Dividend at t =1

R - Required rate

G - Growth rate

P11 = D12/(R-g) = 12.50/(0.135-0.055) = 156.25

P0 = 156.25/(1+0.135)^11 = $38.80

Current share price = $38.80

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