Question

Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next 11 years because the firm needs to plow back its earnings to fuel growth. The company will pay a $6 per share dividend in 12 years and will increase the dividend by 5 percent per year thereafter. Required:If the required return on this stock is 12 percent, what is the current share price

Answer 1

The answer is "$26".

Step-by-step explanation:

`\to growth \ rate =5\% \\\\\to required \ rate =12 \%\\\\\to Dividend = \$ 6 \ per \ share \\\\\to share \ price = (1)/((1+0.12)^(11))* [(6(1+0.05))/(0.12-0.05)]`

`= (1)/((1.12)^(11))* [(6(1.05))/(0.07)]\\\\= (1)/(3.47854999) * [(6(1.05))/(0.07)]\\\\= 0.287476104 * [(6.3)/(0.07)]\\\\= 0.287476104 * 90\\\\=25.8728494\\\\=26`