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Metalica Bearings Inc is a young start up company. No dividends will be paid on the...

Metalica Bearings Inc is a young start up company. No dividends will be paid on the company over the next 9 years because the firm needs to plough back its earnings to fuel growth. The company will pay a dividend of $17.50 prr share in 10 years and will increase its dividend by 5.5% per year. If the required rate of return on this stock is 12%, what ia its current share price?
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Answer #1

Price of share of a company is equal to the present value of all future dividends

Price at the end of year 9 = dividend in year 10/(required rate of return - growth rate)

= 17.50/(12%-5.5%)

= $269.23

Current share price = 269.23/(1.12)^9

= $97.09

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