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Dividend Growth Model:
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The Dividend Growth Model (also known as the Gordon Growth Model) is a method of valuing a company's stock price based on the theory that its stock is worth the sum of all of its future dividend payments, discounted back to their present value. It assumes dividends will grow at a constant rate indefinitely.
The calculator uses the Dividend Growth Model equation:
Where:
Explanation: The model calculates the present value of an infinite series of future dividends that are growing at a constant rate.
Details: Accurate stock valuation is crucial for investment decisions, portfolio management, and financial planning. The dividend growth model provides a fundamental approach to determining the intrinsic value of dividend-paying stocks.
Tips: Enter expected dividend in currency, required return and growth rate as decimals. Required return must be greater than growth rate for the model to be valid.
Q1: What are the limitations of the dividend growth model?
A: The model assumes a constant growth rate forever, which may not be realistic. It also only works for companies that pay dividends and requires that k > g.
Q2: How do I determine the required return (k)?
A: Required return is typically based on the capital asset pricing model (CAPM) and includes risk-free rate, market risk premium, and the stock's beta.
Q3: What if the growth rate exceeds the required return?
A: The model becomes invalid if g ≥ k as it would result in negative or infinite stock price, which is not realistic.
Q4: Can this model be used for non-dividend paying stocks?
A: No, this model specifically requires dividend payments. Other valuation methods like discounted cash flow would be more appropriate.
Q5: How accurate is this model in real-world applications?
A: While theoretically sound, the model's accuracy depends on the accuracy of the input assumptions, particularly the growth rate and required return estimates.