Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next nine years because the firm needs to plow back its earnings to fuel growth. The company will pay a dividend of $14 per share 10 years from today and will increase the dividend by 8 percent per year thereafter. If the required return on this stock is 14 percent, what is the current share price? (Do not round intermediate calculations and round your answer to 2 decimal places, e. g., 32.16.)

the current price of the stock is $71.75

Explanation:

The computation of the current stock price is shown below:

Price at year 9 is

= Dividend ÷ (required rate of return - growth rate)

= $14 ÷ (14 - 8%)

= $233.33

Now the current price of the stock is

= Price at year 9 ÷ (1 + required rate of return)^number of years

= $233.33 ÷ (1 + 0.14)^9

= $71.75

Hence, the current price of the stock is $71.75

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