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Price of a stock Pt=i=t+1(1+r)iDi+1 If dividend growth =0, then Pt=rD (preferred stock) If dividend growth is constant, then Pt=rgDt+1 If dividend growth is non-constant, individually discount all dividends through the non-constant period. Then apply the constant dividend growth formula to compute the horizon value and discount the horizon value back. Required return on a stock (total return) rss= dividend yield + capital gains yield CapitalGainsyield=PtPt+1PtDividendyield=P0D1 Franklin Corporation is expected to pay a dividend of $1.25 per share at the end of the year (D1=$1.25). The stock sells for $46.00 per share, and its required rate of return is 10.5%. The dividend is expected to grow at some constant rate, g, forever. What is the equilibrium expected growth rate? 7.78% 2.72% 12.97% 5.91%