Need Help 100 Points 60% Question 7 (of 10) Award: 0 out of 10.00 points Metalli

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Need Help 100 Points 60% Question 7 (of 10) Award: 0 out of 10.00 points 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 eamings to fuel growth. The company will pay a $15 per share annual dividend 10 years from today and will increase the dividend by 5 percent per year thereafter If the required annual return on this stock is 10.5 percent, what is the current share price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g.. 32.16.) Current share priceS 157.48 Note. This and subsequent problems illustrate that stock prices are the present values of future cash flows Rather than memorizing an equation for stock prices, think about valuing the cash flows. To do so, it is often useful to write out a time line keeping in mind that PV for annuity/perpetuity assumes the cash flows begin in one period, but here no payments are made for the first 9 years eBook & Resources eBook 8.1. Common Stock Vatuation

Explanation / Answer

Price of the stock inYear 9 = 15/(0.105-0.05)= $272.73 Current share price = 272.73/(1.105^9)= $111.04

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