function calculateGrowthRate() {
// Clear previous results and errors
var errorDiv = document.getElementById('errorDisplay');
var resultDiv = document.getElementById('resultBox');
var growthDisplay = document.getElementById('growthResult');
var commentDisplay = document.getElementById('resultComment');
errorDiv.style.display = 'none';
resultDiv.style.display = 'none';
// Get Input Values
var P0 = parseFloat(document.getElementById('stockPrice').value);
var D1 = parseFloat(document.getElementById('expectedDividend').value);
var K_percent = parseFloat(document.getElementById('requiredReturn').value);
// Validation
if (isNaN(P0) || P0 <= 0) {
errorDiv.innerText = "Please enter a valid positive Stock Price.";
errorDiv.style.display = 'block';
return;
}
if (isNaN(D1) || D1 < 0) {
errorDiv.innerText = "Please enter a valid Dividend amount.";
errorDiv.style.display = 'block';
return;
}
if (isNaN(K_percent) || K_percent <= 0) {
errorDiv.innerText = "Please enter a valid Required Rate of Return.";
errorDiv.style.display = 'block';
return;
}
// Logic: Based on Gordon Growth Model P = D1 / (k – g)
// Rearranged: g = k – (D1 / P0)
var K_decimal = K_percent / 100;
var dividendYield = D1 / P0;
var g_decimal = K_decimal – dividendYield;
var g_percent = g_decimal * 100;
// Display Results
resultDiv.style.display = 'block';
growthDisplay.innerText = g_percent.toFixed(2) + "%";
// Logic for commentary
var impliedYield = (dividendYield * 100).toFixed(2);
if (g_percent < 0) {
commentDisplay.innerHTML = "Note: The result is negative. This implies that the current dividend yield (" + impliedYield + "%) is higher than your required return (" + K_percent + "%), suggesting the market prices in a dividend cut or negative growth.";
} else {
commentDisplay.innerHTML = "To justify the current price of $" + P0.toFixed(2) + " given a required return of " + K_percent + "%, the dividends must grow at " + g_percent.toFixed(2) + "% annually.";
}
}
Understanding the Equilibrium Expected Growth Rate
In finance and equity valuation, the Equilibrium Expected Growth Rate is a critical metric derived from the market price of a stock. It represents the rate at which a company's dividends (and effectively its earnings) must grow to justify its current stock price, given a specific cost of equity or required rate of return.
Investors often wrestle with the question: "Is the market too optimistic about this stock?" By calculating the equilibrium growth rate, you can reverse-engineer the market's expectations. If the calculated growth rate is unrealistically high compared to historical performance or industry averages, the stock might be overvalued. Conversely, a low implied growth rate might suggest undervaluation.
The Calculation Logic
This calculator utilizes the inversion of the Gordon Growth Model (also known as the Dividend Discount Model). The standard model solves for the price of a stock based on future dividends:
Price (P₀) = D₁ / (k – g)
Where:
P₀ = Current Stock Price
D₁ = Expected Dividend per share for the next year
k = Required Rate of Return (Cost of Equity)
g = Constant Growth Rate in perpetuity
To find the Equilibrium Expected Growth Rate, we rearrange the formula to solve for g:
g = k – (D₁ / P₀)
In simple terms, the growth rate is equal to the Required Return minus the Dividend Yield.
How to Use This Calculator
To derive the implied growth rate, you need three specific inputs:
1. Current Stock Price ($)
Enter the current market trading price of the stock. This is the "Equilibrium" price determined by supply and demand in the market.
2. Expected Dividend ($)
Enter the total dividend per share expected over the next 12 months. If the company pays quarterly, sum the expected four payments. If you only have the current dividend (D₀), you may need to estimate D₁ slightly higher, but using the current annualized dividend is a common approximation.
3. Required Rate of Return (%)
This is the minimum return an investor expects to earn for the risk undertaken. It is often calculated using the CAPM (Capital Asset Pricing Model), which considers the risk-free rate plus the stock's beta multiplied by the equity risk premium. A typical range for large-cap stocks might be 7% to 12%.
Interpreting Your Results
Once you calculate the Equilibrium Growth Rate, compare it to the company's fundamentals:
Scenario A: Calculated g > Historical Growth. If the calculator shows the market expects 15% growth, but the company has only ever grown at 5%, the stock might be Overvalued (the price is too high for the likely growth).
Scenario B: Calculated g < Historical Growth. If the calculator shows an implied growth of 2% for a high-flying tech company growing at 20%, the stock might be Undervalued.
Negative Growth Rates: If the result is negative, it means the current Dividend Yield is higher than your Required Rate of Return. This often happens in distressed companies where the market expects dividends to be cut in the future.
Limitations of the Model
While powerful, this calculation assumes that the company is in a "steady state" and will grow at a constant rate forever. It is most accurate for mature, stable companies (blue chips) that pay regular dividends. It is less effective for high-growth startups that do not pay dividends or have volatile earnings.