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    Constant-Growth Model and discount rate

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    Constant-Growth Model. A stock sells for $40. The next dividend will be $4 per share. If the rate of return earned on reinvested funds is 15 percent and the company reinvests 40 percent of
    earnings in the firm, what must be the discount rate?

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    Solution Preview

    What is the market rate of return on this stock
    =Next year dividend/Price of the stock + Growth
    =(4/40) +6%
    =16%= Answer

    Here growth = Rate of return on ...

    Solution Summary

    This explains the computation of discount rate by constant-Growth Model