Assume Evco, Inc., has a current price of $50 and will pay a $2 dividend in one year, and its equity cost of capital is 15%. What price must you expect it to sell for right after paying the dividend in one year in order to justify its current price

The expected price after 1 year would be$55.5

Explanation:

According to the given data,

Price of the stock (Po) = $50

Dividend after 1year (D1) = $2

Equity cost of capital (KE) = 15%

The formula for calculating the price after 1 year i. e., (P1) is

Po = (D1 + P1) / 1+KE $50 = ($2 + P1) / (1+0.15)

P1 = [$50 (1.15) ] - $2 = $55.5