Question

Avril Synchronistics will pay a dividend of $ 1.40 per share this year. It is expected that this dividend will grow by 7​% 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 15​%?

Answer 1

$18.73 per stock

Step-by-step explanation:

we need to calculate the company's terminal value and we can use the dividend growth model:

P₀ = Div₁ / (Re - g)

• Div₁ = $1.40 x (1 + 7%) = $1.498
• Re = 15%
• g = 7%

P₀ = $1.498 / (15% - 7%) = $1.498 / 8% = $18.725 ≈ $18.73 per stock