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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 :

Answer:

The answer is "$26".

Explanation:

[tex]\to growth \ rate =5\% \\\\\to required \ rate =12 \%\\\\\to Dividend = \$ 6 \ per \ share \\\\\to share \ price = \frac{1}{(1+0.12)^{11}}\times [\frac{6(1+0.05)}{0.12-0.05}][/tex]

                     [tex]= \frac{1}{(1.12)^{11}}\times [\frac{6(1.05)}{0.07}]\\\\= \frac{1}{3.47854999} \times [\frac{6(1.05)}{0.07}]\\\\= 0.287476104 \times [\frac{6.3}{0.07}]\\\\= 0.287476104 \times 90\\\\=25.8728494\\\\=26[/tex]

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