2: Constant Growth Modeling
Sunday, March 10, 2019
7:24 PM
Stock Value
= D/(R-G)
o
D= expected dividend next year
o
R= the required rate of return as previously computed with CAPM
o
G= the growth rate in dividends.
CAPM: Rs=Rf+ B(Rm-Rf)
o
Rs is the required rate of return
on asset s
o
Rf is the risk-free rate
, and common proxy for this variable is the 10-year
treasury bond rate.
o
Rm is the return on the market
o
B is the measure on how much a company's price reacts to the market as a
whole
.
Cost of equity: Rs= (D1/P0)+g (
Gordon model)
o
Rs is the required rate of return
on asset s
o
D is the dividends next period
, which is found by multiplying the current
dividend, D0, by (1+g).
o
P0 is the current stock price
o
G is the expected growth rate
for the firm
If the firm does not pay a dividend, the Gordon model would not be feasible.
Additionally, because the equation relies on a constant growth rate, this model is
generally only used for mature companies.
The figure (Rm 2 Rf) is also referred to as the

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