Question

Coolibah Holdings is expected to pay dividends of $1.20 every six months for the next three years. If the current price of Coolibah stock is $23.00, and Coolibah's equity cost of capital is 18%, what price would you expect Coolibah's stock to sell for at the end of three years? O A. $32.51 OB. $33.98 O c. $29.55 OD. $35.46

Answer 1

Answer is $29.55

Expected Semiannual Dividend for 3 years = $1.20
Current Price = $23.00

Annual Cost of Capital = 18%
Semiannual Cost of Capital = 9%

Let stock price at the end of 3 years be $x

$23.00 = $1.20/1.09 + $1.20/1.09^2 + $1.20/1.09^3 + $1.20/1.09^4 + $1.20/1.09^5 + $1.20/1.09^6 + $x/1.09^6
$23.00 = $1.20 * (1 - (1/1.09)^6) / 0.09 + $x * (1/1.09)^6
$23.00 = $1.20 * 4.485919 + $x * 0.596267
$23.00 = $5.3831028 + $x * 0.596267
$17.6168972 = $x * 0.596267
$x = $29.55

So, stock price at the end of 3 years is $29.55