How can stock valuation formulas be used to infer the expected rate of return on a common stock?

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How can stock valuation formulas be used to infer the expected rate of return on a common stock?



Answer: If dividends are expected to grow forever at a constant rate g, the expected return on the stock is equal to the dividend yield (DIV1/P0) plus the expected rate of dividend growth. The value of the stock according to this CONSTANT-GROWTH DIVIDEND DISCOUNT MODEL is P0 = DIV1 / (r-g).

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