Question

Credenza Industries is expected to pay a dividend of $ 1.55 at the end of the coming year. It is expected to sell for $ 64 at the end of the year. If its equity cost of capital is 9​%, what is the expected capital gain from the sale of this stock at the end of the coming​ year?

Answer 1

$3.87

Step-by-step explanation:

Given the information:

• Dividend of $ 1.55
• Cost of capital = 9%
• Selling price =$64

the expected capital gain from the sale of this stock at the end of the coming​ year can be calculated :

= Expected selling price after a year -the stock current value

We need to find the stock current value

The current stock value is given by:

The Cost of equity = the change in market price + dividend

<=>
`9 \% \text { of } x=(64-x)+1.55`

<=> 1.09x = $65.55

<=> x = $60.13

=> the expected capital gain = $64 - $60.13 = $3.87