The Constant Growth Model Calculator is a financial tool used to estimate the intrinsic value or present value (PV) of a stock. It employs a straightforward formula:
Formula of Constant Growth Model Calculator
PV = D / (r - g)
Where:
- PV represents the present value or intrinsic value of the stock.
- D signifies the expected annual dividend payment.
- r stands for the required rate of return (discount rate).
- g denotes the constant growth rate of dividends.
This calculation aids investors in evaluating the worth of a stock based on anticipated dividends and growth rates.
General Terms Table
Here's a helpful table summarizing general terms commonly searched by individuals exploring the Constant Growth Model:
| Term | Description |
|---|---|
| Present Value | Intrinsic value of a stock calculated using the Constant Growth Model. |
| Dividend | Portion of a company's profits distributed to shareholders. |
| Discount Rate | The rate used to discount future cash flows to their present value. |
| Growth Rate | Rate at which a company's dividends or earnings increase over time. |
Example of Constant Growth Model Calculator
Let's consider an example to better understand the application of the Constant Growth Model Calculator:
Suppose a company pays an annual dividend of $2.50 per share, the required rate of return is 8%, and the growth rate is 3%. By using the formula mentioned earlier, the PV of the stock can be calculated.
Frequently Asked Questions (FAQs)
A: Input the expected annual dividend, required rate of return, and constant growth rate into the calculator to compute the present value of a stock.
A: The constant growth rate is essential as it helps determine the expected future dividends, influencing the present value of the stock.
A: No, the Constant Growth Model is mainly applicable to stocks with steady, predictable dividend growth patterns.