Question

please help

Avril Symchronistics will pay a dividend of $1 35 per share this year It is expected that this dividend will grow by 3 % each year in the future value of a single share of Avril's stock if the firm's equity cost of capital is 16%7 1/19 Opm What will be the current OA $10 38 /19 pm OB. $11.42 OC. 57 79 /19 m OD $727 /19 pm /19 om 19 m

Answer 1

The facts of the case is reproduced below

First year dividend is $1.35.

Annual Growth rate is 3%

Rate of return on equity is 16%.

Price of a stock can be calculated based on the dividend amount issued, growth rate and the expected rate of return using the dividend Discount model. Under the model, the premise is that the sum of the current and future cash flows should be equal to the stock price. Accordingly, the calculation and formula are as under.

First Year Dividend	1.35
Growth Rate	3%
Rate of return	16%
Stock price =	Dividend Amount/ (Expected rate of return - Growth rate)
Stock price =	1.35/(0.16-0.03)
which is equal to	10.38

Hence the stock price is option A $10.38