Question

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 $14 per share exactly 10 years from today and will increase the dividend by 6 percent per year thereafter.

Required:
If the required return on this stock is 12%, what is the current share price?

Answer 1

$84.14

Step-by-step explanation:

terminal value at year 9 = Div₁₀ / (Re - g) = $14 / (12% - 6%) = $233.33

now we need to find the present value:

present value = future value / (1 + r)ⁿ = $233.33 / (1 + 12%)⁹ = $84.14

The terminal value considers the value of the future dividends as a perpetuity. as we use the dividend growth model formula to calculate it.