The Stock Growth Model Calculator is a powerful tool used in the world of finance to estimate the intrinsic value or fair price of a stock. This estimation is crucial for investors looking to make informed decisions about buying or selling stocks. The calculator utilizes a formula that takes into account the expected annual dividend per share, the required rate of return (discount rate), and the expected constant growth rate of dividends.
Formula of Stock Growth Model Calculator
The formula used in the Stock Growth Model Calculator is as follows:
P=D / (r−g)
Where:
- P is the estimated intrinsic value or fair price of the stock.
- D is the expected annual dividend per share.
- r is the required rate of return (or discount rate) on the stock.
- g is the expected constant growth rate of dividends.
This formula provides a quantitative approach to valuing stocks, helping investors make informed decisions based on financial metrics.
General Terms Table
| Term | Description |
|---|---|
| Intrinsic Value | The true, inherent value of a stock. |
| Dividend | Payments made by a corporation to its shareholders. |
| Required Rate of Return | The minimum return an investor expects. |
| Growth Rate | The rate at which a company’s dividends are expected to grow over time. |
This table serves as a quick reference for users, enhancing the comprehensibility of the calculator.
Example of Stock Growth Model Calculator
Let’s walk through an example to illustrate how the Stock Growth Model Calculator works in real-life scenarios.
Suppose we have an expected annual dividend per share (D) of $2, a required rate of return (r) of 8%, and an expected constant growth rate of dividends (g) of 4%.
P=2 / (0.08−0.04)
P=2 / 0.04 =50
So, the estimated intrinsic value or fair price of the stock is $50.
Most Common FAQs
A1: The required rate of return is often based on the investor’s opportunity cost or desired return. It can be influenced by factors such as prevailing interest rates and the risk associated with the investment.
A2: If the growth rate (g) is negative, the formula becomes undefined. In such cases, the Stock Growth Model may not be applicable, and alternative valuation methods should be considered.
A3: While the Stock Growth Model is a widely used valuation method, it may not be suitable for certain types of stocks, such as those with erratic dividend patterns or high volatility.