Question

Assume​ Evco, Inc. has a current stock price of

$ 47.34

and will pay a

$ 2.05

dividend in one​ year; its equity cost of capital is

16 %

What price must you expect Evco stock to sell for immediately after the firm pays the dividend in one year to justify its current​ price?

Round to the nearest cent.

Answer 1

Given that;
Current stock price (P0) = $47.34
Dividend after one​ year (D1) = $2.05
Equity cost of capital =16%
Suppose, the price after one year is P1
Now,
P0 = (D1 + P1 )/(1 + Equity cost of capital)
Substituting the values, we get;
47.34= (2.05 + P1) / (1+16%)
=>47.34*(1+16%)=(2.05 + P1)
=>47.34*(1.16)-2.05=P1
=>P1=54.9144-2.05 =52.8644 or 52.86 (Rounded to the nearest cent)

Answer: Hence, we would expect to sell the stock at $52.86 immediately after the firm pays the dividend in one year.