Constant growth model. Here are data on two stocks, bth of which have discount rate of 15%.
To determine the value of the two stocks using the constant growth model, you will need two key pieces of information: the expected dividend and the expected growth rate. With these data, you can calculate the value of each stock.
Let's assume the expected dividend is D and the expected growth rate is g.
The constant growth model formula is as follows:
Value of Stock = D / (r - g)
Where:
- D is the expected dividend
- r is the discount rate
- g is the expected growth rate
Let's calculate the value of each stock using the given discount rate of 15%.
1. Calculate the value of Stock A:
Assume Stock A has an expected dividend of $2 and an expected growth rate of 5%.
Value of Stock A = $2 / (0.15 - 0.05)
Value of Stock A = $2 / 0.10
Value of Stock A = $20
Therefore, the value of Stock A would be $20.
2. Calculate the value of Stock B:
Assume Stock B has an expected dividend of $3 and an expected growth rate of 8%.
Value of Stock B = $3 / (0.15 - 0.08)
Value of Stock B = $3 / 0.07
Value of Stock B = $42.86 (rounded to two decimal places)
Therefore, the value of Stock B would be approximately $42.86.
Using the constant growth model, you can calculate the value of any stock by knowing its expected dividend and growth rate and using the appropriate discount rate.