Dividend discount model information

In financial economics, the dividend discount model (DDM) is a method of valuing the price of a company's capital stock or business value based on the fact that their corresponding value is worth the sum of all of its future dividend payments, discounted back to their present value.^[1] In other words, DDM is used to value stocks based on the net present value of the future dividends. The constant-growth form of the DDM is sometimes referred to as the Gordon growth model (GGM), after Myron J. Gordon of the Massachusetts Institute of Technology, the University of Rochester, and the University of Toronto, who published it along with Eli Shapiro in 1956 and made reference to it in 1959.^[2]^[3] Their work borrowed heavily from the theoretical and mathematical ideas found in John Burr Williams 1938 book "The Theory of Investment Value," which put forth the dividend discount model 18 years before Gordon and Shapiro.

When dividends are assumed to grow at a constant rate, the variables are: $P$ is the current stock price. $g$ is the constant growth rate in perpetuity expected for the dividends. $r$ is the constant cost of equity capital for that company. $D_{1}$ is the value of dividends at the end of the first period.

P={\frac {D_{1}}{r-g}}

^ Investopedia – Digging Into The Dividend Discount Model
^ Gordon, M.J and Eli Shapiro (1956) "Capital Equipment Analysis: The Required Rate of Profit," Management Science, 3,(1) (October 1956) 102-110. Reprinted in Management of Corporate Capital, Glencoe, Ill.: Free Press of, 1959.
^ Gordon, Myron J. (1959). "Dividends, Earnings and Stock Prices". Review of Economics and Statistics. 41 (2). The MIT Press: 99–105. doi:10.2307/1927792. JSTOR 1927792.

[1] Investopedia – Digging Into The Dividend Discount Model

[2] Gordon, M.J and Eli Shapiro (1956) "Capital Equipment Analysis: The Required Rate of Profit," Management Science, 3,(1) (October 1956) 102-110. Reprinted in Management of Corporate Capital, Glencoe, Ill.: Free Press of, 1959.

[3] Gordon, Myron J. (1959). "Dividends, Earnings and Stock Prices". Review of Economics and Statistics. 41 (2). The MIT Press: 99–105. doi:10.2307/1927792. JSTOR 1927792.

Dividend discount model information

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