1. NoGrowth Corporation currently pays a dividend of $2.56 per year, and it will
ID: 2571658 • Letter: 1
Question
1. NoGrowth Corporation currently pays a dividend of $2.56 per year, and it will continue to pay this dividend forever. What is the price per share if its equity cost of capital is 14% per year?
The price per share if its equity cost of capital is 14% per year is ___________. (Round to the nearest cent.)
2. 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 12%.
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?
The expected price is _____________. (Round to the nearest cent.)
Explanation / Answer
1.Price=Dividend for next period/(Cost of capital-Growth rate)
$2.56/0.14
=$18.29(Approx).
2.Cost of capital=(Dividend for next period/Current price)+Growth rate
0.12=(1.85/64)+Growth rate
Hence Growth rate=0.12-(1.85/64)
=0.09109375
Hence expected price=Current price(1+Growth rate)
=$64(1+0.09109375)
=$69.83
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.