Reference no: EM13381328

Constant-growth dividend discount model to estimate your company's expected rate of return. You will assume that the company is attempting to achieve a constant growth rate with its dividends and calculate that growth rate. The growth rate plus the expected dividend yield will give the expected rate of return (r = (Div₁/P₀) + g).

1. Calculate the annual dividends that your company paid. You will most likely have collected the four quarterly dividends paid each year, so you will just have to sum those.
   1. In some cases the company may have changed its dividend payment dates so that you may get a year with 5 dividends and/or a year with 3 dividends. You may need to make an adjustment so that you are always working with 4 dividends (i.e., move December up to January, or January back to December, or use the company's fiscal year).
   2. Some companies may have paid extra dividends. This will appear either as an added dividend payment or as an extra large dividend that has been lumped with the regular dividend. If it looks like this has happened with your company you will need to check the appropriate annual report to determine if it was an extra or special dividend, in which case you should not include it in your calculations (but do still show it in your data and make a note that it was an extra dividend).
2. Calculate the annual growth rates of the dividends (i.e., the percentage change in annual dividends paid each year).
3. Calculate the average of your 4 annual growth rates. This is your value for g.
4. Estimate the total dividends that will be paid this year assuming that the firm maintains its current average annual growth rate. Div₁ = Div₀(1 + g).
5. Calculate the firm's expected rate of return using your calculated expected dividend, growth rate, and last year's unadjusted year end price.