Once this task is complete, calculate the expected growth rateusing the Constant
ID: 2662067 • Letter: O
Question
Once this task is complete, calculate the expected growth rateusing the Constant Growth (or Gordon Growth) Model.
You may need additional information to complete this exercise. Youcan find a stock's beta and growth rate at http://quote.yahoo.com/. Once there, enter the ticker forthe company in question. Then, click on "Key Statistics" abouthalfway down the left hand side of the page. You can find the betahere.
Alternatively, you can go to http://www.reuters.com/. Click on "Stocks" at the topleft of the page. Enter the ticker symbol for the company inquestion. Click on "Ratios" about halfway down the left hand sideof the page.
Explanation / Answer
Calculating rate of return on stock usingCAPM:
RE = Rf + ß(RM – Rf)
Risk free rate (Rf) = 4%
Market return (RM) = 12%
Beta of stock (ß) = 0.8
Return on stock (RE) = 0.04 + 0.8 (0.12– 0.04)
Return on stock (RE) = 0.04 + 0.064
Return on stock (RE) = 0.104 (or)10.4%
Calculating Expected growth rate using Gordon GrowthModel:
Dividend growth rate (g) = ($1.68 - $1.63) /$1.63
Growth rate (g) = 3.07%
P0 = D1 / (R-g)
D1 = $1.68
R = 10.4%
G = ?
P0 = $1.68 / (0.104 – 0.0307)
P0 = $1.68 / 0.0733
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