Dividend discount model ( Gordon growth model)

Description

The dividend discount 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. In other words, it is used to value stocks based on the net present value of the future dividends.

Related formulas

Variables

PThe current stock price (dimensionless)
D1The value of the next year's dividends. (dimensionless)
rThe constant cost of equity capital for that company (dimensionless)
gThe constant growth rate in perpetuity expected for the dividends (dimensionless)