Question

Company B is expected to pay dividends of $1.5 every 6 months for the next 3 years. If the current price of Company B stock is $22.6, and Company B's equity cost of capital is 10%. What price would you expect the stock to sell for at the end of 3 years?

Answer 1

Semiannual Dividend = $1.50
Current Price = $22.60
Semiannual Period = 6 (3 years)

Annual Cost of Capital = 10.00%
Semiannual Cost of Capital = 5.00%

Let Price at the end of 3 years be $P

$22.60 = $1.50/1.05 + $1.50/1.05^2 + $1.50/1.05^3 + $1.50/1.05^4 + $1.50/1.05^5 + $1.50/1.05^6 + $P/1.05^6
$22.60 = $1.50 * (1 - (1/1.05)^6) / 0.05 + $P * 0.746215
$22.60 = $7.613538 + $P * 0.746215
$14.986462 = $P * 0.746215
$P = $20.08

Expected price of stock at the end of 3 years is $20.08