constant growth model.docx - 2 Constant Growth Modeling Sunday 7:24 PM Stock Value= D(R-G o D= expected dividend next year o R= the required rate of

constant growth model.docx - 2 Constant Growth Modeling...

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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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