Question

Shares in Company A are currently trading in the market at a price of $16.23. Market analysts expect the next dividend per share (to be paid one year from today) is $1.45 and that the return on equity for Company A’s stock should be 13.5%.

A) What does the market expect Company A’s stock to be trading at one year from today?

Answer 1

The market expects Company A’s stock to be trading at a price reflecting the balance of expected dividends and required return, which can be estimated using the dividend discount model.

Step-by-step explanation:

The market expects Company A’s stock to be trading at the price that balances out the expected dividend and the required rate of return. To find the expected stock price one year from today, we can use the dividend discount model (DDM), which assumes that the current stock price accounts for the present value of all future dividends. By rearranging the DDM, we can solve for the expected price:

Expected Price = (Dividend per Share) / (Return on Equity - Dividend Growth Rate)

Assuming a dividend growth rate of zero (as it is not provided and the company is expected to be disbanded), the expected price would be:

Expected Price = $1.45 / (13.5% - 0%) = $10.74

However, the context provided in the question indicates that the market analysts’ expectations might lead to an adjustment, thereby requiring further details for accurate calculation.