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10 April, 10:14

When different invest Assume Evco, Inc. has a current stock price of $ 50.00 and will pay a $ 2.00 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

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  1. 10 April, 10:44
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    The correct answer is $55.5.

    Explanation:

    According to the scenario, the given data are as follows:

    Stock Price = $50

    Dividend = $2

    Equity cost = 15%

    So, we can calculate the Price of the stock after 1 year by using following formula:

    Stock Price = (Dividend + Stock price after 1 year) : (1 + Equity cost)

    By putting the value we get

    $50 = ($2 + Stock price after 1 year) : (1 + 0.15)

    Stock price after 1 year = [$50 * 1.15] - $2

    = $55.5
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