XCEL Corporation paid a dividend yesterday for $1.50. They expect to pay dividends annually at a constant 6 percent annual growth rate indefinitely. If the required rate of return on this investment is 12 percent, what is the current value of this common stock?

Question

Quizplus · Accepted Answer

The current value of the stock can be calculated using the Gordon Growth Model (also known as the Dividend Discount Model for a perpetually growing dividend), which is P = D1 / (r - g), where P is the price of the stock, D1 is the dividend next year, r is the required rate of return, and g is the growth rate. Here, D1 = $1.50 * (1 + 0.06) = $1.59, r = 0.12, and g = 0.06. Thus, P = $1.59 / (0.12 - 0.06) = $26.50.

XCEL Corporation Paid a Dividend Yesterday for $1