Unlike bond pricing. Excel does not have built-in functions for stock pricing, so we need to create our own equations. We will begin Example 9.2 Stock Valuation Suppose an investor is considering the purchase of a share of the Utah Mining Company. The dividend information and required return are: Perpetuity: PVC/re Dividend next year: Dividend growth rate: Required return: 15.00% $ 3.00 10.00% So, the stock price today with the constant dividend growth modelis: Stock price today: The constant dividend growth equation is just the present value of a growing perpetuity, but we could caution that the equation is very sensitive to the growth rate estimate. Using the same information from above, we can calculate the stock price for various growth rates. Example 9.3: Differential Growth Consider Elixir Drug Company, which is enjoying rapid growth from the introduction of its new back-rub ointment. You want to Initial growth rate: 15.0% Perpetuity: PV - C/ire) Years of initial growth rate: Annuity: Second growth rate (perpet 10.00% 1 1 Required return; 15.00% - r-g Dividend next year: $ 1.15 5 PV = First, we need to calculate the present value of the first 5 dividends, which will be: PV of dividend Dividend growth Dividend 1 15.00% 2 15.00% 3 15.00% 4 15.00% 5 15.00% Present value of first 5 dividends: We have the present value of the first 5 dividends. Now, we need to calculate the present value of the future stock price. The price Stock price in Years And the present value of this future stock price is: Present value of future stock price: The current stock price is the present value of the known dividends, plus the present value of the future stock price, or Current stock price