Use the dividend growth model and estimates of EPS growth to estimate RE.

Expert in finance for calculating the wacc for eastman chemical

The dividend growth model is a simple and widely used tool to estimate the value of a stock. It uses estimates of expected earnings per share (EPS) growth combined with current and future dividend payments to calculate an estimated rate of return (RE). The basic formula for the dividend growth model is RE = D1/P0 + g, where D1 represents the next year’s expected dividend payment, P0 represents the current stock price, and g represents the expected EPS growth rate over time.

The first step in using this model is to determine an accurate estimate of current dividends paid annually from the company’s financial statements. Once this number has been determined, investors can use it as a basis for estimating what next year’s dividends will be worth. By assuming that dividends will grow at the same rate as EPS growth, investors can make a reasonable prediction about what those amounts will be in future periods.

Using these assumptions and inputs, investors can then come up with their own estimates of RE by dividing their assumptions about future dividends by today’s stock price and adding on an estimate of EPS growth rate over time. For example, if we assume that P0 = $50, D1 = $2.50 (based on historical data), and g = 10% (assuming average EPS growth over time), then our estimated RE would be 5% (($2.50/$50)+10%).

By combining data from financial statements with estimates for future performance metrics such as earnings per share growth rates, investors can use the dividend growth model to efficiently calculate realistic expectations for returns associated with investments in particular stocks or other assets classes. In addition to providing useful insight into potential returns on investment opportunities available in markets today, understanding how this model works allows investors to think critically about their decision making process when selecting investments for their portfolios.