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Constant Growth Model

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Why do stock prices change? Suppose the expected D1 is $2, the growth rate is 5 percent and the required rate of return is 10%. Using the constant growth model, what is the price? What is the impact on stock price if the growth rate is 4% or 6%? If rate of return is 9% od 11%?

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The solution explains the use of constant growth model to calculate the stock price.

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Why do stock prices change? Suppose the expected D1 is $2, the growth rate is 5 percent and the required rate of return is 10%. Using the constant growth model, what is the price? What is the impact on stock price if the growth rate is 4% or 6%? If rate of return is 9% od 11%?

The constant growth model is - Price = D1/(Ke-g)
where Ke is ...

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