1. What is Stock Expected Growth Rate?

The Stock Expected Growth Rate (g) represents the anticipated growth rate of a company's earnings, calculated as the product of Return on Equity (ROE) and Retention Ratio. It's a fundamental metric in valuation models like the Gordon Growth Model.

2. How Does the Calculator Work?

The calculator uses the growth rate formula:

Where:

• \( ROE \) — Return on Equity (decimal form, e.g., 0.15 for 15%)
• \( Retention\ Ratio \) — Proportion of earnings not paid as dividends (decimal form)
• \( g \) — Expected growth rate (decimal form)

Explanation: The formula shows how much a company can grow its earnings by reinvesting its profits at its current ROE.

3. Importance of Growth Rate Calculation

Details: The expected growth rate is crucial for stock valuation, dividend discount models, and assessing a company's sustainable growth potential without external financing.

4. Using the Calculator

Tips: Enter ROE and Retention Ratio as decimals (e.g., 0.20 for 20%). Both values should be between 0 and 1.

5. Frequently Asked Questions (FAQ)

Q1: What is a good expected growth rate?
A: This varies by industry, but typically rates between 0.05-0.15 (5%-15%) are considered good for mature companies.

Q2: How is Retention Ratio calculated?
A: Retention Ratio = 1 - Dividend Payout Ratio. It's the proportion of earnings retained by the company.

Q3: What are the limitations of this formula?
A: It assumes constant ROE and retention ratio, which may not hold true in reality. It's best for stable, mature companies.

Q4: Can growth rate exceed ROE?
A: No, since retention ratio ≤ 1, growth rate cannot exceed ROE in this model.

Q5: How does this relate to the Gordon Growth Model?
A: This growth rate (g) is a key input in the Gordon Growth Model for valuing stocks with constant growth dividends.