1) Assume Evco, Inc. has a current stock price of $51.93 and will pay a $1.95 dividend in one year; its equity cost of capital is16%. What price must you expect Evco stock to sell for immediately after the firm pays the dividend in one year to justify its current price?

2) Suppose Acap Corporation will pay a dividend of $2.86 per share at the end of this year and $2.97

per share next year. You expect Acap's stock price to be $52.26 in two years. Assume that Acap's equity cost of capital is 11.4%.

a. What price would you be willing to pay for a share of Acap stock today, if you planned to hold the stock for two years?

b. Suppose instead you plan to hold the stock for one year. For what price would you expect to be able to sell a share of Acap stock in one year?

c. Given your answer in(b ),what price would you be willing to pay for a share of Acap stock today if you planned to hold the stock for one year? How does this compare to your answer in (a)?