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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 then pay a dividend of $16.25 per share 12 years from today and will increase the dividend by 5.5 percent per year thereafter. The required return on the stock is 13.5 percent. What is the price of the stock 11 years from today?

Sagot :

Shahzaibfaraz

Answer:

P11 = $203.125

Explanation:

Using the constant growth model of dividend discount model, we can calculate the price of the stock in year 11. The DDM values a stock based on the present value of the expected future dividends from the stock. The formula for price under this model is,

P0 = D0 * (1+g) / (r - g)

Where,  

 

D1 is dividend expected for the next period /year  

g is the growth rate

r is the required rate of return or cost of equity

P11 = 16.25 / (0.135 - 0.055)

P11 = $203.125

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