1. What is the Required Return on Stock?

The required return on a stock represents the minimum return an investor expects to achieve for investing in that stock, considering its risk. The Gordon Growth Model simplifies this calculation by summing the dividend yield and expected growth rate.

2. How Does the Calculator Work?

The calculator uses the Gordon Growth Model equation:

Where:

• Dividend Yield — Annual dividend per share divided by current stock price
• Growth Rate — Expected constant growth rate of dividends

Explanation: This model assumes dividends grow at a constant rate indefinitely and that the required return exceeds the growth rate.

3. Importance of Required Return Calculation

Details: Calculating required return helps investors determine if a stock meets their investment criteria, compare different investment opportunities, and make informed buy/sell decisions.

4. Using the Calculator

Tips: Enter the current dividend yield (as a percentage) and the expected constant growth rate of dividends (as a percentage). Both values must be non-negative.

5. Frequently Asked Questions (FAQ)

Q1: What if a company doesn't pay dividends?
A: The Gordon model isn't suitable for non-dividend paying stocks. Other models like CAPM would be more appropriate.

Q2: How accurate is this model?
A: It works best for stable, mature companies with predictable dividend growth. It's less accurate for high-growth or volatile companies.

Q3: Where can I find dividend yield?
A: Dividend yield is typically reported on financial websites or can be calculated as (Annual Dividend per Share / Current Stock Price) × 100.

Q4: How to estimate growth rate?
A: Growth rate can be estimated from historical dividend growth, analysts' forecasts, or the company's sustainable growth rate (ROE × retention ratio).

Q5: What's a good required return?
A: This depends on the investor's opportunity cost and risk tolerance. Typically, higher risk stocks require higher returns.