Matilda Industries pays a dividend of $2.25 per share and is expected to pay this amount indefinitely. If Matilda's equity cost of capital is 12%, which of the following would be expected to be closest to Matilda's share price?

Question

Quizplus · Accepted Answer

Using the Gordon Growth Model, the formula to calculate the price is:
P = D / (r - g) 
where:
P = price
D = dividend per share 
r = required rate of return 
g = expected growth rate of dividends

Since the expected growth rate of dividends is not given, we assume it to be 0% as the dividend is expected to remain constant indefinitely.

Thus, 
P = $2.25 / (0.12 - 0) = $18.75

Therefore, the closest price to the expected share price of Matilda Industries is $18.75, which is option B.

Matilda Industries Pays a Dividend of $2