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

Financial expert to calculate the wacc of eastman chemicals

Dividend growth models are a common and easily used method to calculate the stock’s value. To calculate the estimated rate of return (RE), it uses current and future dividend payments in combination with estimates of expected earnings per shares (EPS) growth to compute an estimate of that. 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. Investors can use this information to make an accurate prediction of future dividend growth rates by assuming that EPS will increase at the same pace as dividends.

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. As an example, suppose that we have P0=50 and D1=2.50 on the basis of historical data. If g = 10%, our RE estimate would then be 5% (\$2.50/\$50).

The dividend growth model allows investors to combine financial statements data with future performance estimates such as earnings-per-share growth rates. Investors are able to quickly calculate realistic expectations of returns for investments in stocks and other asset classes by using the combined data. This model provides valuable insight on potential investment returns in today’s markets and allows investors to critically consider their decisions when choosing investments to add to their portfolios.

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