Assume Evco Inc has a current stock price of 64 and will pa

Assume? Evco, Inc., has a current stock price of

$ 64

and will pay a

$ 1.85

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?

Solution

For finding the price at which Evco stock sells immediately after the dividend is paid is given by the following equation

P₀ = Div +P₁ /(1+r_e)

Where P0 is the current market price

Div is the dividend

P1 is the new market price and

r_e= expected rate or equity cost of capital

We are given the following values

P0= $64

Div= $1.85

e_r = 15% or 0.15

We need to find the price after the dividend is paid in one year.

Substituting the values in the equation , we have

$ 64= $1.85 + P1/(1+0.15)

$64 -1.85 = P1/(1.15)

$62.15 *1.15 =P1

So P1=$71.4725 ~ $71. 47

So $71.47 is the price expected of Evco stock to be sold immediately after the firm pays the dividend in one year to justify the current price.