# Corporation A has grown at a rate of 5% per year and is expected to continue in that way...

Corporation A has grown at a rate of 5% per year and is expected to continue in that way indefinitely. The next dividend is expected to be $6 per share. If the market expects a 15% rate of return on Corporation A, at what price must it be selling? (In other words, what is its current selling price?) ## Stock Valuation: One of the most widely-used stock valuation models is the dividend growth model. The model uses the future dividends to calculate the value of the stock by discounting them back to the present. ## Answer and Explanation: The current selling price is$60.00

The value of the stock can be calculated as:

{eq}Price = \dfrac{D_{1}}{r-g} {/eq}

Here:

• D1 is the next dividend = $6.00 • r is the expected return = 15% or 0.15 • g is the dividend growth rate = 5.0% or 0.05 • Price is the current selling price Using the aforementioned values into the formula we have: {eq}Price = \dfrac{$ 6.00 }{0.15-0.05} {/eq}

{eq}Price = \$60.00 {/eq} 