##### Asked by: Yoel Valentei

asked in category: General Last Updated: 4th June, 2020# What determines G and R in the dividend growth model?

**dividend growth model determines**if a stock is overvalued or undervalued assuming that the firm's expected

**dividends**grow at a value

**g**forever, which is subtracted from the required rate of return (RRR) or k.

Besides, what is r in dividend discount model?

**r** – the estimated cost of equity capital (usually calculated using CAPM. CAPM formula shows the return of a security is equal to the risk-free return plus a risk premium, based on the beta of that security) g – the constant **growth rate** of the company's **dividends** for an infinite time.

Furthermore, what are the limitations of the dividend growth model? The other notable **limitation** of the **model** is that due to its extreme sensitivity to changes in the **growth** rate 'g' any miscalculation of g or any incorrect use of g would yield absolutely wrong results. Hence it requires extreme sensitivity to the **growth** rate which is not necessarily adhered to.

Also to know is, how do you use the dividend growth model?

**That formula is:**

- Rate of Return = (Dividend Payment / Stock Price) + Dividend Growth Rate.
- ($1.56/45) + .05 = .0846, or 8.46%
- Stock value = Dividend per share / (Required Rate of Return – Dividend Growth Rate)
- $1.56 / (0.0846 – 0.05) = $45.
- $1.56 / (0.10 – 0.05) = $31.20.

How do you calculate required rate of return?

Calculating RRR using CAPM Subtract the risk-free **rate of return** from the market **rate of return**. Take that result and multiply it by the beta of the security. Add the result to the current risk-free **rate of return** to determine the **required rate of return**.