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 Avril share if the firm's equity cost of capital is 14%?

Question

Quizplus · Accepted Answer

The current value of a share can be calculated using the Gordon Growth Model (Dividend Discount Model for a perpetuity with growth), which is P = D1 / (r - g), where D1 is the dividend next year ($1.30 * 1.05), r is the cost of equity (14%), and g is the growth rate (5%). Plugging in the values gives P = $1.365 / (0.14 - 0.05) = $15.16.

Avril Synchronistics Will Pay a Dividend of $1