Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next 8 years because the firm needs to plow back its earnings to fuel growth. The company will then pay a dividend of $14.00 per share 9 years from today and will increase the dividend by 5.75 percent per year thereafter. The required return on the stock is 13.75 percent. What is the price of the stock 8 years from today

Question

Mathematics

Jesus Mitchell

10 October, 10:47

Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next 8 years because the firm needs to plow back its earnings to fuel growth. The company will then pay a dividend of $14.00 per share 9 years from today and will increase the dividend by 5.75 percent per year thereafter. The required return on the stock is 13.75 percent. What is the price of the stock 8 years from today

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Sandra Benjamin · Answer 1

Step-by-step explanation:

Stock price = Net year dividend / (Required return - growth rate)

= 14 / (0.1375-0.0575) = 14/0.08 = $175

The price of the stock 8 years from today is $175