Question

Coolibah Holdings is expected to pay dividends of $ 1.40 every six months for the next three years. If the current price of Coolibah stock is $ 21.60​, and​ Coolibah's equity cost of capital is 16​%, what price would you expect​ Coolibah's stock to sell for at the end of three​ years?

A. $ 28.81

B. $ 24.01

C. $ 27.61

D. $ 26.41

Answer 1

Expected dividend every 6 months for next 3 years(D) = $1.40

Current Share Price(P0) = $21.60

Equity cost of Capital = 16%

Half-yearly Cost of equity (r) = 16%/2

= 8%

Calculating the Stock price 3 years from now:-

21.60 = 6.4720 + P3(0.63016962685)

P3 = $24.01

So, price at the end of 3 year is $24.01

Hence, Option B

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