Expected rate of return, r1= Expected dividend yield + Expected growth rate, or capital gain yield =D1+g Suppose that D0=$1.00 and the stock's last dosing 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 equilibrium, and the most appropriate required rate of return is r=10.00%. The dividend received in period 1 is D1=$1.00(1+0.0350)=$1.04 and the estimated intrinsic value in the same period is based on the constant growth model: P1=pr=5D2. The dividend yield for period 1 is and it will each period. The capital gain yeld 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 infinity 3.505 6.50% 10.00% Note that this stock is called a "Hold" as its forecasted intrinsic value is equal to its current price P0=r1D1=0.10000.0350$1.04=$15.85 and the 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% rather than 3.50%, the stock's forecasted intrinsic value would be P0=0.0000.0550$104=$22.89, which is greater than $15.85. In this case, you would call the stock 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 Step 2i Learni Constant Growth Valuation