

Constant Growth Stock ValuationStock Valuation is more difficult than Bond Valuation because stocks do not have a finite maturity and the future cash flows, i.e., dividends, are not specified. Therefore, the techniques used for stock valuation must make some assumptions regarding the structure of the dividends. A constant growth stock is a stock whose dividends are expected to grow at a constant rate in the forseeable future. This condition fits many established firms, which tend to grow over the long run at the same rate as the economy, fairly well. The value of a constant growth stock can be determined using the following equation: where
Please see the Constant Growth Stock Exercise for additional example problems which illustrate the calculation of the other variables, i.e., the growth rate, required return, and dividend.
A more general form of the Constant Growth Stock Valuation formula which can be used to find the price of the stock at any period t in the future is given by the following:
© 2002  2010 by Mark A. Lane, Ph.D.
