The Constant (Gordon) Growth Model: Cost of Stock (RATE) = (D1 /P ) + g Note: This method ONLY works for stock with dividends thatare expected to grow at a constant rate The firm's common stock iscurrently selling for $40 per share. The dividend expected to bepaid at the end of the coming year is $5.07. Its dividend paymentshave been growing at a constant rate for the last five years. Fiveyears ago, the dividend was $3.45. It is expected that to sell, anew common stock issue must be underpriced at $1 per share and thefirm <<<<<<< must pay $1 per share inflotation costs. Calculate the cost (RATE) of the new issue ofpreferred stock Common Stock Computing Growth Rate Price $40 NPER 5Computing the Gordon Growth Model Equation for Yield/Cost/Rate ofStock D1 $5.07 RATE ? Cost of Stock = (D1 / P ) + g g 8% PV -3.45(5.07 / 38) + 8% = Cost/share $2 PMT 0 Note: You were given theexpected dividend (D1) in this problem. Adj. Price $38 FV 5.07 Theexpected or future dividend is used in the formula. CPT ? 8.00%Always read the problem carefully to determine if it gives you theexpected or the current dividend. If you are given the currentdividend, it will need to be adjusted. (See note below) The GordonGrowth Model: Current Price of Stock = D1 / (r - g) The BradshawCompany's most recent dividend was $6.75. The historical dividendpayment by the company shows a constant growth rate of 5% per year.If the required rate of return is 8%, what is the price of thestock. Common Stock Computing the Gordon Growth Model Equation forValue/Price of Stock Price ? Price of Stock = D1 / (r - g) D1 6.75* (1 + g) = 6.75 * (1 + 5%) / ( 8% - 5%) Cost of Stock 8.00% =7.0875 / (3%) growth rate 5.00% 236.25 Note: You were given thecurrent dividend (D0) in this problem, since you need the expecteddividend in the formula, you will needed to multiply the 6.75 by (1+ g) to convert the D0 to D1. The Capital Asset Pricing Model(CAPM) Rs = RF + (b * (rm – RF)) or kp = krf + (km -krf) x b Note: This method is used to calculate the required rateof return of an investment given its degree of risk. Note: The twoformulas are the same, just stated a little different. Whenentering the formula in excel, you will need to add the extraparenthesis so excel knows which order to compute the components.Assume the risk-free rate is 5%, the expected rate of return on themarket is 15%, and the beta of your firm is 1.2. Given theseconditions, what is the required rate of return on your company'sstock? Computing the CAPM Required Rate of Return: Rs =RF + (b * (rm – RF)) = 5% + (1.2 * ( 15% - 5%))<<