Avril Synchronistics will pay a dividend of $1.30 per share this year.It is expected that this dividend will grow by 5% each year in the future.What will be the current value of a single share of Avril's stock if the firm's equity cost of capital is 14%?

Question

Quizplus · Accepted Answer

We can use the formula for calculating the present value of a growing perpetuity to find the current value of Avril's stock:

PV = D / (r - g)

where PV is the present value, D is the dividend, r is the equity cost of capital, and g is the expected growth rate of the dividend.

Substituting the given values, we get:

PV = 1.30 / (0.14 - 0.05) = 14.44

Therefore, the current value of a single share of Avril's stock is $14.44. The best choice is C).

Avril Synchronistics Will Pay a Dividend of $1