# Constant-Growth Model and discount rate

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?

https://brainmass.com/business/accounting-for-corporations/constant-growth-model-and-discount-rate-172975

#### 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

Note:

Here growth = Rate of return on ...

#### Solution Summary

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

$2.19