Question

15) Lunar Adventures Inc is expected to pay a dividend of $1.40 per share at the end of this year and expected to pay a dividend of $1.50 per share at the end of the second year. As well, you expect the stock price to be $25.00 at the end of the second year. If the firm's equity cost of capital is 10% and you plan to hold the stock for one year, the price you would expect to be able to sell a share of the stock in one year (just after the dividend is paid) is closet to: a) $22.73 b) $23.17 c) $24.09 d) $25.49 e) $26.50

Answer 1

= S1.40 Expected dividends . D1 D2 S1.50 Terminal value of stock at the end of year 2 , P2 $25 Cost of equity capital , Ke = 10% Price of stock at the end of Year 1 , P1 = (D2 + P2) * PVIF(Ke, 1) ($1.50 $25)* PVIF(10%, 1) = $26.50 0.9091 = $24.09115 $24.09 Per share (Rounded) Ans Price of stock at the end of Year 1 $24.09