Home
Back
Implied Growth Rate Formula:
| From: | To: |
The implied growth rate is a financial metric that calculates the expected growth rate of dividends based on current stock price, expected dividend, and required rate of return. It's derived from the Gordon Growth Model and helps investors assess whether a stock is fairly valued.
The calculator uses the implied growth rate formula:
Where:
Explanation: The formula rearranges the Gordon Growth Model to solve for the growth rate rather than the stock price.
Details: Calculating the implied growth rate helps investors determine if a stock's current price reflects realistic growth expectations. It's particularly useful for valuing dividend-paying stocks and comparing investment opportunities.
Tips: Enter the expected dividend in dollars, current stock price in dollars, and required rate of return as a percentage. All values must be positive numbers.
Q1: What is a reasonable implied growth rate?
A: Reasonable growth rates vary by industry, but typically range from 2-6% for mature companies. Extremely high implied growth rates may indicate an overvalued stock.
Q2: How does this differ from historical growth rates?
A: Implied growth rate is forward-looking and market-derived, while historical growth looks at past performance. Both are important for comprehensive analysis.
Q3: Can this formula be used for non-dividend stocks?
A: No, this formula specifically requires dividend payments. Alternative valuation methods are needed for non-dividend stocks.
Q4: What are the limitations of this calculation?
A: It assumes constant growth forever, which may not be realistic. It's also sensitive to input changes and doesn't account for company-specific risks.
Q5: How often should I recalculate the implied growth rate?
A: Regularly, as stock prices and dividend expectations change frequently. Quarterly recalculations are recommended for active investors.