Equity: adding consensus growth rate to dividend yield

[archived_user]

Came across a practice problem. The solution provided adds consensus growth rate to dividend yield to arrive returns…..
div yield=3%
consensus growth=5.9%
Ke=3%+5.9%=8.9%
why is it not 3%*(1+5.9%)

 

[archived_user]

Properly, it should be:
(1 + 3%)(1 + 5.9%)
Adding 3% to 5.9% is an approximation.
Your approach doesn’t get the 5.9% growth in share price. Check it.

 

[archived_user]

perfect..i got it…thank you.

 

[archived_user]

You’re welcome.