Question

When different invest Assume​ Evco, Inc. has a current stock price of $ 50.00 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

The correct answer is $55.5.

Step-by-step explanation:

According to the scenario, the given data are as follows:

Stock Price = $50

Dividend = $2

Equity cost = 15%

So, we can calculate the Price of the stock after 1 year by using following formula:

Stock Price = ( Dividend + Stock price after 1 year) ÷ ( 1 + Equity cost)

By putting the value we get

$50 = ($2 + Stock price after 1 year) ÷ ( 1 + 0.15 )

Stock price after 1 year = [$50 × 1.15] - $2

= $55.5