Question

Rylan Industries is expected to pay a dividend of $5.70 year for the next four years. If the current price of Rylan stock is $31.27, and Rylan's equity cost of capital is 12%, what price would you expect Rylan's stock to sell for at the end of the four years

Answer 1

Answer: Rylan's stock would sell for $21.96 at the end of the four years

Explanation:

PV = Current Price = $31.27

D = Dividend paid each year =$5.70

r = Equity cost of capital = 12%

FV = Price of Rylan's stock at the end of four years = ??

N = Number of years = 4

PV = D $[\frac{1 - \frac{1}{(1+r)^{N} } }{r} ]$ + $\frac{FV}{(1+r)^{4} }$

31.27 = 5.70 $[\frac{1 - \frac{1}{(1+0.12)^{4} } }{0.12} ]$ + $\frac{FV}{(1+0.12)^{4} }$

Solve for FV,

FV = $21.96

Rylan's stock would sell for $21.96 at the end of the four years