Question

Assume​ Evco, Inc. has a current stock price of $54.51 and will pay a $2.20 dividend in one​ year; its equity cost of capital is 18%. 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?

Answer 1

first we have to compute the dividend growth rate
as per DDM growth rate = required rate - expected dividend next year/Current price
g=	=18%-2.2/54.51
g=	13.96%
Price after year = Expected dividend in year 2/(required rate - growth rate)
Expected dividend in year 2 = 2.2*(1+13.96%)				2.51
Price after a year =			=2.51/(18%-13.96%)
			62.12
Therefore answer =			62.12