Question

Mason Holdings is expected to pay dividends of $.20 every quarter for the next three years. If the current price of Mason stock is $22.60, and Mason's equity cost of capital is 18%, what price would you expect Mason's stock to sell for at the end of three years?

Answer 1

Price of the stock at the end of three years =$34,27

Step-by-step explanation:

Price of the stock today =
`(D1)/((1+ke)^1)+(D2)/((1+ke)^2)+(D3)/((1+ke)^3)+(P3)/((1+ke)^3)`.

Where D1 is the total dividend earned in year 1 =$0.2*4=$0.8

D1=D2=D3=$0.8

therefore, from the given information

`$22.60=(0.8)/((1+0.18)^1) + (0.8)/((1+0.18)^2) +(0.8)/((1+0.18)^3) + (P3)/((1+0.18)^3)`.

Solve for P3, which is the price of the stock at the end of three years =$34,27.