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15 July, 14:01

Assume Evco, Inc. has a current stock price of $ 46.48 and will pay a $ 2.20 dividend in one year; its equity cost of capital is 20 %. 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? We can expect Evco stock to sell for $ nothing. (Round to the nearest cent.)

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  1. 15 July, 14:40
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    What is given:

    Current Price, P0 = $46.48

    Expected Dividend, D1 = $2.20

    Cost of Capital, k = 20.00%

    Expected Stock Price - X

    P0 = (D1 + X) / (1 + k)

    $46.48 = ($2.20 + X) / (1 + 0.20)

    $46.48 = ($2.20 + X) / 1.20

    $46.48 = $2.20 + X

    X = $44.28

    Expected stock price in 1 year is $44.28
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