Enter the annual dividends, the required rate of return by investors, and the current price of a stock to calculate the constant growth rate.
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Constant Growth Rate Formula
The following formula is used to calculate the required constant growth rate.
CR = [ (P*r) – D ] / (P + D)
- Where CR is the constant growth rate %
- P is the current price
- r is the required return rate on dividends
- D is the current annual dividends
Constant Growth Rate Definition
A constant growth rate is defined as the average rate of return of an investment over a time period required to hit a total growth percentage that an investor is looking for.
Constant Growth Rate Example
How to calculate a constant growth rate?
- First, determine the current price.
Determine the current price of the stock or investment.
- Next, determine the required return on dividends.
Calculate the required return on dividends.
- Next, determine the current annual dividends.
Calculate the annual dividends.
- Finally, calculate the constant growth rate.
Calculate the constant growth rate required to hit the required return rate on dividends.
The constant growth rate is a return rate on a stock that is required in order to hit a certain growth rate on the dividend.