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Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next 10 years because the firm needs to plow back its earnings to fuel growth. The company will pay a $10 per share dividend in 11 years and will increase the dividend by 4 percent per year thereafter. NOTE: This is a growing perpetuity where the cash flows start in 11 years.
If the required return on this stock is 8 percent, what is the current share price? (Do not round your intermediate calculations.) HINT: the present value equations for an annuity and perpetuity give the value ONE period before the cash flows start, so you will need to discount an additional 10 years.
A) $119.27
B) $107.22
C) $110.01
D) $121.59
E) $115.80
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Present value calculations:
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