Wellington Corporation is expected to pay a monthly dividend of $0.12 for the next three years.If the current price of Wellington stock is $41.35,and Wellington's equity cost of capital is 15% per year,what price would you expect Wellington's stock to sell for at the end of the three years?

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Quizplus · Accepted Answer

The price of Wellington's stock at the end of three years can be calculated using the dividend discount model for a period of time. The model discounts the expected dividends and the price of the stock at the end of the period back to the present value at the given cost of capital. Here, the monthly dividend is $0.12, which annualizes to $1.44 ($0.12 * 12 months). Given the equity cost of capital is 15% per year, we can calculate the expected price after three years, not including the dividends paid during those three years, as the present value of the dividends does not affect the stock price at the end of the period directly.The formula for the present value of a future sum is:$$ PV = \frac{FV}{(1 + r)^n} $$where $PV$ is the present value, $FV$ is the future value, $r$ is the annual rate, and $n$ is the number of years.Given that the stock price is expected to grow or be valued based on the dividends and the cost of capital, we can rearrange the formula to solve for the future value (stock price after three years), assuming the current price reflects the present value of future dividends and stock price:$$ FV = PV \times (1 + r)^n $$However, in this scenario, we are interested in the price of the stock at the end of three years, which would be primarily determined by the dividends paid out during those years and the expected price of the stock at that time. Since the dividends are being paid out and not reinvested, they do not directly contribute to the future stock price calculation in this context. The future stock price would be more influenced by the company's performance, market conditions, and investor expectations beyond the dividend payments.Given the information provided and the typical approach to such a calculation, we do not have explicit future cash flows beyond the dividends, and the question seems to focus on the valuation based on the dividend payments and the cost of capital. A precise calculation would require assumptions about the reinvestment of dividends or the growth rate of the stock, which are not provided.Therefore, without specific details on the reinvestment of dividends or growth rates, the calculation for the future stock price directly from the given information is not straightforward. The correct approach involves calculating the present value of future dividends and adding this to the calculated future value of the stock based on expected returns, but the question as posed does not provide a clear path to calculate this without making additional assumptions. Given this, the response provided was aimed at explaining the general concept rather than providing a specific numerical answer due to the lack of detailed information required for a precise calculation.

Wellington Corporation Is Expected to Pay a Monthly Dividend of $0.12