Final answer:
To justify the current price of Evoo, Inc.'s stock at a 10% cost of equity, one must expect it to sell for approximately $51.74 immediately after the dividend of $1.95 is paid in one year. This is calculated using the Dividend Discount Model with the assumption of no growth (g = 0).
Step-by-step explanation:
The subject question can be answered using the Dividend Discount Model (DDM) also known as the Gordon Growth Model, which is relevant in the realm of finance, specifically in the valuation of stocks. To determine the expected stock price of Evoo, Inc. immediately after the dividend payment, the model considers the current stock price, the dividend payment, and the cost of equity. According to DDM, the intrinsic value of a stock is the present value of all future dividends. This means that in one year, just after the $1.95 dividend is paid, the stock must sell for a price that makes the present value of this dividend plus the future sale price equal to the current stock price at the required return rate.
The formula to calculate the expected stock price after the dividend payment is: P0 = D1 / (k - g), where P0 is the current stock price, D1 is the expected dividend one year from now, k is the cost of equity, and g is the growth rate, which in this problem is assumed to be zero because there\'s no information regarding growth. Plugging in the values we get: $49.72 = $1.95 / (0.10 - g), thus g is assumed to be zero. Rearranging the formula to solve for the future stock price (P1), we have P1 = (P0 * (1+k)) - D1. Thus, the expected stock price just after the dividend is paid is P1 = ($49.72 * (1 + 0.10)) - $1.95 = $53.69 - $1.95 = $51.74.