A Quick Reference Guide for the Constant Dividend Growth Rate Valuation Model If the fee of increase
in not unusualplace inventory dividends is predicted to be regular into the indefinite destiny and this fee
of increase is much less than the not unusualplace stockholder’s required fee of go back, the discounted
coins go with the drift valuation version for not unusualplace inventory reduces to the subsequent easy
formula: Vcs = D0 (1 + g) rcs - g = D1 rcs - g (10–2) Definitions and Assumptions: • Vcs = the fee of a
proportion of not unusualplace inventory, that is same to the prevailing fee of all destiny predicted
dividends. • D0 = the maximum latest annual coins dividend obtained through the not unusualplace
stockholder that became paid withinside the 12 months the valuation is being done (Year 0). • g = the
predicted annual fee of increase withinside the coins dividend payment, that is assumed to be regular
forever. • D1 = D0 (1 + g) = the predicted dividend for the give up of Year 1. • rcs = the not unusualplace
stockholder’s required fee of go back for the stocks of not unusualplace inventory. Note that this isn't a
market’s required yield or promised fee of go back however the fee of go back the investor expects to
earn from making an investment withinside the firm’s inventory. This predicted fee of go back displays
the riskiness of the inventory’s destiny dividends. >> END FIGURE 10.1 Expected Rate of Return =
Risk@Free Rate of Interest + Common Stock Beta Coefficient a Expected Rate of Return at the Market
Portfolio - Risk@Free Rate of Interest b (8–6) M10_TITM2189_13_GE_C10.indd 339 18/05/17 12:forty
four PM 340 PART 2 | Valuation of Financial Assets Valuing Common Stock Consider the valuation of a
proportion of not unusualplace inventory that paid a $2 dividend on the give up of final 12 months and
is predicted to pay a coins dividend each 12 months from now to infinity. Each 12 months the dividends
are predicted to develop at a fee of 10 percent. Based on an evaluation of the riskiness of the not
unusualplace inventory, the investor’s required fee of go back is 15 percent. What is the fee of this not
unusualplace inventory? STEP 1: Picture the problem With a developing perpetuity, a timeline doesn’t
have an finishing factor however is going on forever, with the coins flows developing at a regular fee
duration after duration—on this case, 12 months after 12 months: $2.00 $2.00(1.10) $2.00(1.10)2
$2.00(1.10)3 $2.00(1.10)four $2.00(1.10)5 0123 i = 15% Time Period four 5 Cash Flow Years Value of not
unusualplace inventory = Present fee of predicted dividends . . . The developing dividends cross on
forever. STEP 2: Decide on an answer strategy Because the fee a proportion of inventory may be
considered as the prevailing fee of a developing perpetuity, the equation for the fee of a proportion of
inventory, that is offered in Equation (10–2), appears precisely like Equation (6–6), the equation for the
fee of a developing perpetuity. Because this equation entails most effective division, there may be no
want to look at an Excel answer or any specific keystrokes with a monetary calculator. STEP 3: Solve In
this problem, we ought to first decide D1, the dividend subsequent duration. We understand the
inventory