Explain dividend models?

Posted by

To view Verified answers click on the button below.

Dividend growth Model
The Gordon growth model is used to determine the intrinsic value of a stock based on a
future series of dividends that grow at a constant rate. Given a dividend per share that is
payable in one year, and the assumption the dividend grows at a constant rate in
perpetuity, the model solves for the present value of the infinite series of future
Value of Stock = Dividend pay-out next year / Required rate of return + Expected
growth rate

Dividend Discount Model
The dividend discount model (DDM) is a procedure for valuing the price of a stock by
using the predicted dividends and discounting them back to the present value. If the value
obtained from the DDM is higher than what the shares are currently trading at, then the
stock is undervalued.
Value of Stock = Dividend pay-out next year / Discount rate – Expected growth rate