Question

Mason Holdings is expected to pay dividends of $.20 every quarter for the next three years. If the current price of Mason stock is $22.60, and Mason's equity cost of capital is 18%, what price would you expect Mason's stock to sell for at the end of three years?

Answer 1

Answer:

Price of the stock at the end of three years =$34,27

Explanation:

Price of the stock today = $\frac{D1}{(1+ke)^1}+\frac{D2}{(1+ke)^2}+\frac{D3}{(1+ke)^3}+\frac{P3}{(1+ke)^3}$.

Where D1 is the total dividend earned in year 1 =$0.2*4=$0.8

D1=D2=D3=$0.8

therefore, from the given information

$22.60=\frac{0.8}{(1+0.18)^1} + \frac{0.8}{(1+0.18)^2} +\frac{0.8}{(1+0.18)^3} + \frac{P3}{(1+0.18)^3}$.

Solve for P3, which is the price of the stock at the end of three years =$34,27.