Suppose that D0=$1.00 and the stock's last closing price is $26.25. It is expected that earnings and dividends will grow at a conatant rate of g=5.00% per vear and that the stock's price will grow at this same ratin. Lat us assume that the stock is fairly priced, that is, it is in equilibrium, and the most appropriate required rate of return is rn=9.00% The dividend recelved in period 1 is D1=$1.00(1+0.0500)=$1.05 and the eatimatad intrinsic value in the same period is based on the constant growth modeli B1=wn,n1. Using the same logic compute the dividends, prices, and the present value of each of the dividends at the end of each period. The dividend yield for period 1 is and it vill 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 9.00% for the next 5 vears, what is the forecasted tobal retum out to infinity? 4.00% 5.00% 9.00\%: 14.00% expected total return is equal to the required rate of return rn. If the market was more optimutic and the growth rate would be 6.00% rather call the stock a "Buy"? Suppose that the growth rate is expected to be 3,00%. In this case, the stock's forecanted intrinsic value would be its current price, and the stock would be a Suppose D0=1 and D1=$1.05 and it is expected that eamings and dividends will grow at a constant rate of 5.00% 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 9.00%. When the growth rate is the required rate of return, you can use the following formula to calculate the price of the stock 4. years from todar P0(gr3)4 (1+g)4D1 rsb1 P0(1+g)4 And the price of the stock 4 years from today is Step 3: Practice: Constant Growth Valuation Now it's time for you to practice what you've learned. Suppose that a stock is expected to pay a dividend of $4,25 at the end of this year and it is expected to grow at a constant rate of 5.00% a year. If it is required return is 9.00%. What is the stock's expected price 4 years from today? $31.91 5101.19 $129.15 5149.98