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 dividend of $17 per share exactly 12 years from today and will increase the dividend by 5.5 percent per year thereafter. If the required return on this stock is 13 percent, what is the current share price according to DDM?

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TomShelby TomShelby · Answer 1 · 2019-09-25T23:37:34+02:00

Answer:

according to dividend grow model the stock value today will be of 52.29

Explanation:

We will use the dividen grow model to calculate the present value ofthe future dividends whic will start 12 years from now:

[tex]\frac{divends}{return-growth} = Intrinsic \: Value[/tex]

d = 17

r = 0.13

g = 0.055

[tex]\frac{17}{0.13-0.055} = Intrinsic \: Value[/tex]

Intrinsic value 226,67

This is set 12 years into the future, so we will adjust using the present value of a lump sum:

[tex]\frac{Principal}{(1 + rate)^{time} } = PV[/tex]

principal 226.67

time 12.00

rate 0.13

[tex]\frac{226.67}{(1 + 0.13)^{12} } = PV[/tex]

PV 52.29