The Perpetual Growth Rate (PGR) model is a fundamental valuation tool used in finance to estimate the intrinsic value of a stock or company that is expected to grow at a constant rate indefinitely. This model is a variation of the dividend discount model (DDM) and is particularly useful for mature companies with stable growth prospects.
The formula for the perpetual growth rate model is:
Stock Value = D1 / (r – g)
Where:
D1 is the expected dividend per share in the next period (Year 1).
r is the required rate of return (also known as the discount rate). This represents the minimum return an investor expects to earn on an investment, considering its risk.
g is the constant perpetual growth rate of dividends.
For the model to be valid, the required rate of return (r) must be greater than the perpetual growth rate (g). If 'g' is greater than or equal to 'r', the formula would result in a negative or infinite stock value, which is not practically meaningful.
This calculator will help you estimate the value of a stock based on its expected future dividends, your required rate of return, and an assumed constant growth rate. Simply input the required values below.
function calculatePerpetualGrowthRate() {
var dividendNextYear = parseFloat(document.getElementById("dividendNextYear").value);
var requiredRateOfReturn = parseFloat(document.getElementById("requiredRateOfReturn").value);
var perpetualGrowthRate = parseFloat(document.getElementById("perpetualGrowthRate").value);
var resultDiv = document.getElementById("result");
resultDiv.innerHTML = ""; // Clear previous results
if (isNaN(dividendNextYear) || isNaN(requiredRateOfReturn) || isNaN(perpetualGrowthRate)) {
resultDiv.innerHTML = "Please enter valid numbers for all fields.";
return;
}
// Convert percentages to decimals for calculation
var r_decimal = requiredRateOfReturn / 100;
var g_decimal = perpetualGrowthRate / 100;
if (r_decimal <= g_decimal) {
resultDiv.innerHTML = "Error: The Required Rate of Return (r) must be greater than the Perpetual Growth Rate (g).";
return;
}
if (r_decimal <= 0) {
resultDiv.innerHTML = "Error: The Required Rate of Return (r) must be positive.";
return;
}
if (dividendNextYear < 0) {
resultDiv.innerHTML = "Error: Expected Dividend Next Year (D1) cannot be negative.";
return;
}
var stockValue = dividendNextYear / (r_decimal – g_decimal);
resultDiv.innerHTML = "Estimated Stock Value: $" + stockValue.toFixed(2) + "";
}