Question

Assume Evco, Inc., has a current price of $50 and will pay a $2 dividend in one year, and its equity cost of capital is 15%. What price must you expect it to sell for right after paying the dividend in one year in order to justify its current price

Answer 1

Answer:

The expected price after 1 year would be$55.5

Explanation:

According to the given data,

Price of the stock (Po) = $50

Dividend after 1year (D1) = $2

Equity cost of capital (KE) =15%

The formula for calculating the price after 1 year i.e.,(P1 ) is

                         

                          Po = (D1 + P1 )/ 1+KE                                      $50= ($2 + P1) / (1+0.15)

                        P1 = [$50(1.15)] - $2 = $55.5