XYZ corp is expected to pay dividends of $3.50 at the end ofevery year for...

XYZ corp is expected to pay dividends of $3.50 at the end of every year for the next 3 years. If the current price of XYZ corp is $15, and XYZ’s equity cost of capital is 20%, what price would you expect XYZ’s stock to sell for at the end of three years (immediately after the third dividend is paid)?

Expert Solution

Price of Stock is PV of Cfs from it.

Let X be the price after 3 Years.

Year	CF	PVF @20%	PV of CFs
1	$ 3.50	0.8333	$ 2.92
2	$ 3.50	0.6944	$ 2.43
3	$ 3.50	0.5787	$ 2.03
3	X	0.5787	0.5787X
Price Today			7.37+0.5787X

Thus 7.37 + 0.5787X = 15

0.5787X = 15 - 7.37

= 7.63

X= 13.18

Price after 3 years is $ 13.18.

jeff jeffy answered 2 years ago

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