Calculate Constant Growth Rate (g) - Definition, Formula and Example

Definition:

Constant Growth Rate (g) is used to find present value of stock in the share which depends on current dividend, expected growth and required return rate of interest by investors.

Formula :

Where, k is Required rate of return

Example :

Raj has the current price of the share 100000 and current dividend of his share is 1000 per share (yearly), and he require return of 10%. Compute his the Constant Growth Rate (g)?

Given,

Current Annual Dividend = 1000 Current Price = 100000 Required Rate of Return (k) = 10 %

To find,

Constant Growth Rate (g)

Solution:

CGR = [(100000 * 0.1) - 1000] / (100000 + 1000) CGR = (10000 - 1000) / 101000 CGR = 9000 / 101000 CGR = 8.9109 %