Question

Assume​ Evco, Inc. has a current stock price of $47.88 and will pay a $2.10 dividend in one​ year; its equity cost of capital is 10% 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?

Answer 1

equity cost of capital =(D1/Current price)+Growth rate

0.1=(2.1/47.88)+Growth rate

Growth rate=0.1-(2.1/47.88)

=0.05614035

Hence price expected=Current price*(1+Growth rate)

=$47.88*(1+0.05614035)

which is equal to

=$50.568