Stock Expected Return
EXPECTED RETURN COMMON STOCK
INPUTS LAST DIVIDEND PRICE OF STOCK EXPECTED GROWTH RATE OUTPUT EXPECTED RETURN 11.8% $ 1.25 Dollar Amount $ 45.00 Dollar Amount 9.00% Decimal
0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
11.8% 3.8% 4.8% 5.8% 6.8% 7.8% 8.8% 9.8% 10.8% 11.8% 12.8% 13.8% 14.8% 15.8% 16.8% 17.8% 18.8% 19.8% 20.8% 21.8% 22.8%
EXPECTED RETURNS AT DIFFERENT GROWTH RATES
25.0%
20.0%
EXPECTED RETURN
15.0%
10.0%
5.0%
0.0%
0%
5%
10% GROWTH RATE
15%
20%
25%
Stock Price - Zero Growth
PRICE OF COMMON STOCK - ZERO GROWTH MODEL
INPUTS LAST DIVIDEND EXPECTED RETURN (ROR) OUTPUT PRICE OF STOCK $ 50.00 $ 3.00 Dollar Amount 6.00% Decimal
Stock Price - Constant Growth
PRICE OF COMMON STOCK - CONSTANT GROWTH MODEL
INPUTS LAST DIVIDEND EXPECTED RETURN (ROR (k) GROWTH RATE (g) OUTPUT PRICE OF STOCK $ 23.00 1.17 Dollar Amount 13.60% Decimal 8.10% Decimal k must > g $
STOCK PRICE
9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 21%
$ $ $ $ $ $ $ $ $ $ $ $ $
21.27 61.58 40.34 30.00 23.88 19.83 16.96 14.81 13.15 11.82 10.73 9.83 9.07
STOCK PRICE AT DIFFERENT RORs
$70.00 $60.00
$50.00
$40.00 $30.00 $20.00 $10.00 $5% 7% 9% 11% 13% 15% 17% 19% 21% REQUIRED RATE OF RETURN
Stock Price - Variable Growth
PRICE OF STOCK - VARIABLE GROWTH MODEL
INPUTS
LAST YEAR (e.g., 1996) LAST DIVIDEND GROWTH RATE (g) EXPECTED RETURN (ROR) (k) 1996 $ 1.17 1997 1998 30.00% 1999 30.00% 2000 8.10% 2001 8.10% Decimal
30.00% 13.60% Decimal
OUTPUT
DIVIDENDS PRICE CASH FLOWS PRESENT VALUE $39.09 $ 1.52 $ 1.98 $ 2.57 $ 2.78 $ 54.61 $ 57.39 $ 3.00
$
1.52
$
1.98
$
2.57
9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 21%
$ $ $ $ $ $ $ $ $ $ $ $
$39.09 114.83 74.92 55.48 43.98 36.38 30.99 26.96 23.84 21.36 19.33 17.64 16.22
STOCK PRICE AT DIFFERENT RORs
$140.00 $120.00 PRICE OF STOCK
$100.00
$80.00 $60.00
$40.00
$20.00 $6% 11% 16% 21% REQUIRED RATE OF RETURN