Constant Growth Stock

Conceptual Overview: Explore how the value of a stock changes as a function of the discount interest rate.

The blue stair$-$step line depicts the value of future stock dividends. The orange stair$-$step line depicts the present value of those future dividends discounted by rs for a stock with initial dividend D$0=$ $$1\mathrm{.}15$ and an anticipated growth rate of g $=4\%.$ Use the slider to change rs and observe the corresponding changes in the equilibrium price of the stock.

P

$^$

$0$

$=$

$$

t

$=$

$1$

$\backslash$infty

P

V

D

t

$=$

D

$0$

$($

$1$

$+$

g

$)$

r

s

$$

g

$=$

$

$1$

$.$

$1$

$5$

$($

$1$

$+$

$0$

$.$

$0$

$4$

$)$

$0$

$.$

$1$

$$

$0$

$.$

$0$

$4$

$=$

$

$1$

$9$

$.$

$9$

$3$

$$P

$^$

$$

$0$

$=$

$$t$=1$

$\backslash$infty

$$ PVD

$$t

$=$

$$r

$$s

$$g

$$

$$D

$0$

$(1+$g$)$

$=$

$0\mathrm{.}10\mathrm{.}04$

$$

$$$$1\mathrm{.}15(1+0\mathrm{.}04)$

$=$$$19\mathrm{.}93$

$0$

$5$

$10$

$15$

$20$

$0\mathrm{.}0$

$0\mathrm{.}5$

$1\mathrm{.}0$

$1\mathrm{.}5$

$2\mathrm{.}0$

$2\mathrm{.}5$

$3\mathrm{.}0$

Years

Dividend $($$$1)$

$5$

$10$

$15$

$20$