Question

Assume Evco, Inc. has a current stock price of $53.49 and will pay a $1.95 dividend in one year; its equity cost of capital is 15 %. 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 $_______ (Round to the nearest cent.) 

Answer 1

59.56

First we find growth rate

g= Cost of equity- D1/Price

= 15%-1.95/53.49

= 11.3545%

Then Price at end of year 1 = D2/(k-g)

= 1.95*(1+11.3545%)/(15%-11.3545%)

= $59.56