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24 August, 18:01

A stock is expected to pay $ 1.55 per share every year indefinitely and the equity cost of capital for the company is 8.8 %. What price would an investor be expected to pay per share ten years in the future?

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  1. 24 August, 18:59
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    The price an investor would be expected to pay per share ten years in the future is $17.61

    Explanation:

    P10 = [D1 * (1 + g) ^n] / (k - g)

    Where:

    P10 is the expected share price after ten years

    D1 is the expected dividend for year 1 = $ 1.70

    g is the dividend growth rate per year but we know that dividend is expected to be constant, g = 0

    k is the cost of capital for the company = 8.2%

    n is the number of years to calculate share price = 10

    P10 = $ 1.55 * (1 + 0%) ^10 / (0.088 - 0)

    = $ 1.55/0.088

    = $17.61

    Therefore, The price an investor would be expected to pay per share ten years in the future is $17.61
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