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XYZ corp is expected to pay dividends of $2.00 at the end of every year for...

XYZ corp is expected to pay dividends of $2.00 at the end of every year for the next 3 years. If the current price of XYZ corp is $20, and XYZ’s equity cost of capital is 25%, what price would you expect XYZ’s stock to sell for at the end of three years (immediately after the third dividend is paid)?

A- $39.06

B- $31.44

C- $16.10

D- $20.00

Solutions

Expert Solution

Price of XYZ stock at the end of 3 years =Price in Year 0*(1+r)^3-Dividend Year 1*(1+r)^2-Dividend Year 2*(1+r)^1-Dividend year 3 =20*(1+25%)^3-2*(1+25%)^2-2*(1+25%)-2 =31.44 (Option b is correct option)

jeff jeffy answered 2 years ago
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