Question

Assume​ Evco, Inc. has a current stock price of

$ 54.01$54.01

and will pay a

$ 1.85$1.85

dividend in one​ year; its equity cost of capital is

13 %13%.

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.)

Answer 1

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Answer:

Price of the stock (P_o) = $54.01

Dividend after 1year (D₁₎ = $1.85

Equity cost of capital (K_E) =13%

The formula for calculating the price after 1 year i.e.,(P₁ ) is

                         

                           P_o = (D₁ + P₁ )/ 1+K_E                                      $54.01= ($1.85 + P₁₎ / (1+0.13)

                         P₁ = [$54.01(1.13)] - $1.85 = $59.18 ~ $59