Final answer:
Using the dividend discount model and assuming no growth, the expected stock price of Evco, Inc. in one year, when considering a 17% equity cost of capital and a $1.90 dividend, is calculated to be $13.08 as the sum of the dividend and the expected sale price next year.
Step-by-step explanation:
To calculate the expected future stock price of Evco, Inc., one must use the dividend discount model (DDM). Assuming Evco, Inc. has a current stock price of $46.23 and will pay a $1.90 dividend in one year, we need to consider the equity cost of capital, which is given as 17%. The formula to calculate the expected price is:
Expected stock price (P1) = Dividend (D1) / (Equity cost of capital (r) - Growth rate (g))
However, since no growth rate is provided, we assume the dividend stays stable and represents the entire return. Thus, using the equity cost of capital:
Expected stock price (P1) = Dividend (D1) / Equity cost of capital (r)
To find the expected stock price one year forward (P1), ignoring growth, the calculation is:
Expected stock price (P1) = $1.90 / 0.17 = $11.18
This price is added to the dividend received to get the total expected return from holding the stock for one year. Hence, the expected price an investor would be willing to pay today for this stock (P0), accounting for the future sale price and dividend, is:
Expected stock price today (P0) = Dividend (D1) + Expected stock price next year (P1)
P0 = $1.90 + $11.18 = $13.08
The expected price must be rationalized with the actual market price which may not align due to a variety of market factors, including but not limited to investor expectations, market trends, and company performance.