Constant Growth Dividend Valuation Model

The constant growth dividend valuation model is a method of estimating the intrinsic value of a stock based on its future dividends. This model assumes that the dividend paid by the company will grow at a constant rate indefinitely. It is also known as the Gordon growth model or the dividend discount model.

The formula for the constant growth dividend valuation model is as follows:

PV = D / (r – g)

Where:

PV = Present value of the stock

D = Dividend per share

r = Required rate of return

g = Expected growth rate of dividends

The constant growth dividend valuation model assumes the following:

• Dividend growth rate: The dividend growth rate is constant and is expected to continue indefinitely.
• Required rate of return: The required rate of return on the stock is greater than the growth rate of the dividend.
• Stable growth: The growth rate of the company is expected to remain stable in the future.

The uses of the constant growth dividend valuation model are as follows:

• Valuation of stocks: This model is used to estimate the intrinsic value of a stock based on its expected future dividends.
• Comparison of investment opportunities: This model is used to compare the expected returns of different stocks and to identify investment opportunities.
• Stock selection: This model is used by investors to identify undervalued stocks that can provide high returns.
• Investment decision-making: This model is used by investors to make investment decisions based on the estimated intrinsic value of a stock.