Question

Assume​ Evco, Inc. has a current stock price of $ 46.48 and will pay a $ 2.20 dividend in one​ year; its equity cost of capital is 20 %. 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

Step-by-step explanation:

What is given:

Current Price, P0 = $46.48

Expected Dividend, D1 = $2.20

Cost of Capital, k = 20.00%

Expected Stock Price - X

P0 = (D1 + X) / (1 + k)

$46.48 = ($2.20 + X) / (1 + 0.20)

$46.48 = ($2.20 + X) / 1.20

$46.48 = $2.20 + X

X = $44.28

Expected stock price in 1 year is $44.28