Question

Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next 7 years because the firm needs to plow back its earnings to fuel growth. The company will then pay a dividend of $16.75 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? (Do not round intermediate calculations. Round your answer to 2 decimal places

Price in 7 years $__________

What is the current share price? (Do not round intermediate calculations. Round your answer to 2 decimal places

Current share price $__________

Answer 1

Answer:

$209.38 and $83.67

Explanation:

The computation is shown below:

The price of the stock 7 years from today is

= Next year dividend ÷ (required rate of return - growth rate)

= $16.75 ÷ (14% - 6%)

= $16.75 ÷ 8%

= $209.38

Now the current share price is

= Price of the stock ÷ (1 + required rate of return)^time period

= $209.38 ÷ (1 + 0.14)^7

= $209.38 ÷ 1.14^7

= $83.67