What is the current share price?Metallica Bearings, Inc., is a young start-up co

Question

What is the current share price?Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next seven years, because the firm needs to plow back its earnings to fuel growth. The company will then pay a dividend of $13.00 per share 8 years from today and will increase the dividend by 6 percent per year thereafter. The required return on the stock is 14 percent.

What is the price of the stock 7 years from today?

What is the price of the stock 7 years from today?

Explanation / Answer

Answer:

Given in the question :

The company will not pay any dividend till 7 years.

First dividend paid 8 years from today D1 = $13 per share

And growth rate in dividend = g = 6%

Required rate of return on the stock is K = 14%

Therefore by suing Gordan’s formula of dividend

Current market price of Share = P0 = D1/(K-g)

or

P0 = $13/(14% - 6%) = $13/8% = $162.50

This will be the price of share 7 Years from today.

Now to find the current market price of the share we have to discount this price ($162.50) for 7 years by taking 14% discount rate.

Current market price = $162.5 / (1+14%)7 = $64.94106

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