Cost of Equity (Constant Dividend Growth) Calculator

Gordon’s dividend growth model proposes that current market prices are a reflection of the present value of future dividends of a company discounted with an appropriate cost of equity. The model has established a relationship between three variables, i.e., Current Market Price, Dividends, and Cost of Equity. Further, there are three possible situations for future dividends:

  1. Future dividends uncertain or not following any trend
  2. Future dividends having a Constant Growth Rate
  3. Dividends having Phased Growth Situation in future. 5% for 3 Years, then 3% forever.

In the current post, the calculator will focus 2nd the situation, i.e., the constant growth rate.

The formula for calculating a cost of equity using the dividend discount model is as follows:

Where,

Ke = D1/P0 + g

Ke = Cost of Equity

D1 = Dividend for the Next Year, It can also be represented as ‘D0*(1+g)‘ where D0 is the Current Year Dividend.

P0 = present value of a stock.

Most common representation of a dividend discount model is P0 = D1/(Ke-g). This formula is meant for calculating the present value of the stock when the cost of equity is known. The formula mentioned above for calculating the cost of equity (Ke) when the other parameters are known.

Cost of Equity Calculator

How to Calculate using Calculator?

The cost of Equity (Constant Dividend Growth) calculator is easy to calculate the accurate cost of equity. There are three basic inputs required for calculating, and they are as follows:

  1. Current Year Dividend
  2. Constant Growth Rate
  3. Current Market Price

Excel Calculator – Cost Of Equity (Constant Dividend Growth)

You can also download our excel based calculator for cost of equity (Constant Dividend Growth)
Excel Calculator for Cost of Equity(Constant Dividend Growth) (169 downloads )


Sanjay Borad

Sanjay Bulaki Borad

MBA-Finance, CMA, CS, Insolvency Professional, B'Com

Sanjay Borad, Founder of eFinanceManagement, is a Management Consultant with 7 years of MNC experience and 11 years in Consultancy. He caters to clients with turnovers from 200 Million to 12,000 Million, including listed entities, and has vast industry experience in over 20 sectors. Additionally, he serves as a visiting faculty for Finance and Costing in MBA Colleges and CA, CMA Coaching Classes.

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