Question

A stock is expected to pay $ 1.55 per share every year indefinitely and the equity cost of capital for the company is 8.8​%. What price would an investor be expected to pay per share ten years in the​ future?

Answer 1

The price an investor would be expected to pay per share ten years in the​ future is $17.61

Step-by-step explanation:

P10 = [D1*(1 + g)^n]/(k – g)

Where:

P10 is the expected share price after ten years

D1 is the expected dividend for year 1 = $ 1.70

g is the dividend growth rate per year but we know that dividend is expected to be constant, g = 0

k is the cost of capital for the company = 8.2%

n is the number of years to calculate share price = 10

P10 = $ 1.55*(1 + 0%)^10/(0.088 – 0)

= $ 1.55/0.088

= $17.61

Therefore, The price an investor would be expected to pay per share ten years in the​ future is $17.61