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

The current value of a stock with constant growth can be calculated using the Gordon Growth Model: P = D1 / (r - g), where D1 is the dividend next year ($1.30 * 1.05 = $1.365), r is the cost of equity (14% or 0.14), and g is the growth rate (5% or 0.05). Plugging in the values: P = $1.365 / (0.14 - 0.05) = $14.44.

Avril Synchronistics Will Pay a Dividend of $1