Final answer:
The future price of a stock that pays a constant annual dividend and has a fixed equity cost of capital will remain the same in the future as it is today. Hence, an investor would be expected to pay $18.90 per share five years into the future.
Step-by-step explanation:
The student asked about the future price of a stock that currently pays an annual dividend of $0.70 per share indefinitely and has an equity cost of capital of 7.9%. To estimate the price of the stock five years from now, we use the dividend discount model (DDM). The DDM is based on the premise that the value of a stock is the present value of all its future dividends.
Given that the dividend is expected to be the same each year, we can use the formula for a perpetuity: Stock Price (P) = Dividend per share (D) / Equity cost of capital (r). Plugging in the numbers provided: P = $0.70 / 0.079, which gives us the current price, confirming the provided current stock price. To estimate the price in five years, we need to discount it back at the equity cost of capital for the number of years forward, but since the dividends are constant and we assume that the cost of capital remains the same, the future stock price will also remain the same, at $18.90, in five years.