Constant Growth Valuation is a fundamental concept in finance. of return, which is a riskless rate plus a risk premium, then the expected value of firm's stock is determined as follows: Value of stock. P0=PV of expected future dividends =(1+t0)2D1+(1+m1)2D1++(1+t1)2D=r=1[1+r1,rD For many companies it is reasonable to predict that dividends will grow at a constant rate, 8 . Thus, the previous equation may be rewritten as follows: =ttb(1+n)=rx1D1 If the stock is in equilibrium, rs must equal the expected dividend yieid plus an expected capital gains vield. Thus, you can solve far an expected rate of return, rr : Expected rate of return, r4= Expected dividend yield + Expected growsh rate, or capital gain yield =nnD1+n Expected rate of return, r^i= Expected dividend yield + Expected growth rate, or capital gain yield =p0p1+8 Suppose that D0=$1,00 and the stock's last closing price is $15.85, It is expected that earnings and dividends will grow at a constant rate of g=3.50% per year and that the stock's price will grow at this same rate. Let us assume that the stock is fairly priced, that is, it is in equllibrium, and the most appropriate required rate of return is r,=10.00%. The dividend received in period i is 1=$1.00(1+0.0350)=$1.04 and the estimated intrinsic value in the same period is based on the constant growth model: P1=D2rD2. Using the same logic, compute the dividends, prices, and the present value of each of the oividends at the end of each period. The dividend yield for period 1is and it will each perios. The capital gain yield expected during period 1 is and it will each period. Expected rate of return, r^i= Expected dividend yield + Expected growth rate, or capital gain yield =p0p1+8 Suppose that D0=$1,00 and the stock's last closing price is $15.85, It is expected that earnings and dividends will grow at a constant rate of g=3.50% per year and that the stock's price will grow at this same rate. Let us assume that the stock is fairly priced, that is, it is in equllibrium, and the most appropriate required rate of return is r,=10.00%. The dividend received in period i is 1=$1.00(1+0.0350)=$1.04 and the estimated intrinsic value in the same period is based on the constant growth model: P1=D2rD2. Using the same logic, compute the dividends, prices, and the present value of each of the oividends at the end of each period. The dividend yield for period 1is and it will each perios. The capital gain yield expected during period 1 is and it will each period. The dividend yield for period 1 is and it will each period. The capital gain yield expected during period 1 is and it will each period. If it is forecasted that the total return equals 10.00% for the next 5 years, what is the forecasted total return out to infint 3.50% 6.50% 10,00% 13.50% expected total return is equal to the required rate of return r1. If the market was more optimistic and the growth rate would be 5.50% rother than -5tock a "Buy". Suppose that the growth rate is expected to be 2.50%. In this case, the stock's forecasted intrinsic value would be price, and the stock would be a 5tep 2. Learn: Constant Growth Valuation Watch the following video for an example, then answer the question that follows. The dividend yield for period 1 is and it will each period. The capital gain yield expected during period 1 is and it will each period. If it is forecasted that the total return equals 10.00% for the next 5 years, what is the forecasted total return out to infint 3.50% 6.50% 10,00% 13.50% expected total return is equal to the required rate of return r1. If the market was more optimistic and the growth rate would be 5.50% rother than -5tock a "Buy". Suppose that the growth rate is expected to be 2.50%. In this case, the stock's forecasted intrinsic value would be price, and the stock would be a 5tep 2. Learn: Constant Growth Valuation Watch the following video for an example, then answer the question that follows. Suppose D0=1 and D1=$1.04 and it is expected that earnings and dividends. Will grow at a constant rate of 3.50% per year and that the stock's price will grow at this same rate, Let us assume that the stock is fairly priced and the required rate of return is 10.00%. When the growth rate is years from today the required rate of return, you can use the following formula to calculate the price of the stock 5 P0(gri)P0(1+g)5P1(1+g)3P0(Qr0)5 And the price of the stock 5 years from today is 5tep 3t Practice: Constant Growth Valuation Now it's time for you to practice what you've leamed. Suppose that a stock is expected to pay a dividend of $4.70 at the end of this year and it is expected to grow at a constant rate of. 3.50% a year. If it is required return is 10.00%. What is the stock's expected price 5 years from today? $60.88 $69.86 Suppose D0=1 and D1=$1.04 and it is expected that earnings and dividends. Will grow at a constant rate of 3.50% per year and that the stock's price will grow at this same rate, Let us assume that the stock is fairly priced and the required rate of return is 10.00%. When the growth rate is years from today the required rate of return, you can use the following formula to calculate the price of the stock 5 P0(gri)P0(1+g)5P1(1+g)3P0(Qr0)5 And the price of the stock 5 years from today is 5tep 3t Practice: Constant Growth Valuation Now it's time for you to practice what you've leamed. Suppose that a stock is expected to pay a dividend of $4.70 at the end of this year and it is expected to grow at a constant rate of. 3.50% a year. If it is required return is 10.00%. What is the stock's expected price 5 years from today? $60.88 $69.86 What is the stock's expected price 5 years from today? $60.88$69.86$72.31$85.88