 to understand that how a stock's market price approaches its intrinsic value. We have an example to consider, now for undervalued stock whose intrinsic value is greater than its current price or P0 this means that there is some discrepancy. Now for such stock the expected rate of capital gain needs certain assumptions like this discrepancy will never disappear, the P0 will tend upward at the rate of G forever. The discrepancy between V0 and P0 will grow also at the same rate. We can also see this discrepancy in our example where for the current year the discrepancy is equal to 2$ and that is the difference between V0 and P0 and for next year the discrepancy remains the same at least at 2 but the value is 2.08 so this discrepancy is also growing for the second year. This means that expected return will exceed the required rate of return or the K as the dividend yield is higher than it would be provided the present value of the stock or P0 or stock's current market price is equal to its intrinsic value. This means if we quantify our assumption then expected return is equal to D1 over P0 plus G we have D1 of 4$ and current stock price of 48$ we have growth rate of 4% the resulting answer is 12.3% so our expected rate of return has also been increased. Now identifying this undervalued stock can get an expected dividend that will be exceeding the required return by 30p basis point as we have seen our example. Now there is an alternative to this assumption and that says that the gap between P0 and V0 will be vanished by year end so the P0 will be equal to V0 this means that it will be equal to 52$ in our example if you see let's see the example expected return which is equal to P1 plus P0 P1 over P0 plus P1 minus P0 over P0 so we have two components here dividend yield and the capital gain yield this means that we have a 4 divided by 48 plus 52 minus 48 divided by 48 so when we sum up these two yields we have expected rate of return of 16.67% the stock in future expect to generate only fair rate of return means that many stock analysts then assume that P0 will approaches to V0 gradually over a certain period of time for example over a 5 year period the expected 1 year holding period return may be somewhere between 12.33% and the 16.67% that we have computed earlier.