Current dividend yield=2% Current dividend growth rate=10%, declining over 6 years, to a mature phase growth rate of 5% If company is fairly priced, what is the expected rate of return on the stock?
P0 = [D0 (1+g_l) + D0 (g_s - g_l)] / (r - g_l) D1/P0 = 0.02 ==> P0 = D0 (1.1) / 0.02 ==> P0 = 55 D0 as it’s fairly priced… 55 D0 = [D0 (1+g_l) + D0 (g_s - g_l)] / (r - g_l) ==> r = 7.18 %
Aztek , you ignore the H factor completely. P0/D0=50. r= GS+ ( ( 1+GL)+H/2*(GS-GL) )/50 H=6 r=0.074
7.4% is correct. If you are doing this by memorizing the above r equation, you are putting too much load on your memory. You should just use the H-model formula and work from there…it’s a whole lot easier that way.
Yes, I forgot H factor, but it was a typo…when I calculated I did consider H factor… Qn: Current Div Yield ===> D0/P0 or D1/P0 ?
Current Div Yield = D0/P0 If you used the H , then are you sure the answer is correct?
I try to cut down on the formula overload by using the original formula, then plug in the available numbers and solve for the unknown, works like a charm, every time.
I took it as D1/P0 and that explains the difference in the final answer…