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22 July, 09:03

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

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  1. 22 July, 09:05
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    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
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