Constant Growth Rate Calculator

Formula

The formula to calculate the constant growth rate is:

\[ CR = \frac{(P \times r) - D}{P + D} \]

Where:

\(CR\) is the constant growth rate (%)
\(P\) is the current price
\(r\) is the required return rate on dividends
\(D\) is the current annual dividends

What is a Constant Growth Rate?

A constant growth rate is defined as the average rate of return of an investment over a time period required to hit a total growth percentage that an investor is looking for. It represents the steady rate at which dividends or other returns are expected to grow over time.

Example Calculation 1

Let's assume the following values:

Current Price (P) = 50
Required Return Rate (r) = 8%
Current Annual Dividends (D) = 2

Using the formula:

\[ CR = \frac{(50 \times 0.08) - 2}{50 + 2} = \frac{4 - 2}{52} \approx 0.0385 \, \text{or} \, 3.85\% \]

The Constant Growth Rate is approximately 3.85%.

Example Calculation 2

Let's assume the following values:

Current Price (P) = 100
Required Return Rate (r) = 10%
Current Annual Dividends (D) = 5

Using the formula:

\[ CR = \frac{(100 \times 0.10) - 5}{100 + 5} = \frac{10 - 5}{105} \approx 0.0476 \, \text{or} \, 4.76\% \]

The Constant Growth Rate is approximately 4.76%.