PV = D1 / (k-g)
k = (D1/PV) + g
= Dividend yield + growth over time.
This expression for the cost of equity (required rate of return) tells us that the return on an equity investment has two components:
- The dividend yield (D1/PV at year 0)
- Growth over time (g)
Return on share investment = Dividend Yield + Growth over Time: