Question

Assume​ Evco, Inc., has a current stock price of $ 50 and will pay a $ 2.00 dividend in one​ year; its equity cost of capital is 15 %. What price must you expect Evco stock to sell for immediately after the firm pays the dividend in one year to justify its current​ price?

Answer 1

$55.5

Step-by-step explanation:

Stock price: $50

Cost of capital (discounting rate): 15%

We need to calculate the future value of stock:

FV = PV*(1+discounting rate)^years = 50*(1+15%)= $57.5

Since the firm pay dividend in one year, the justified future value then = $57.5 future value - $2.0 dividend = $55.5