Dividend discount model

The dividend discount model (DDM) 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. The equation most widely used is called the Gordon growth model (GGM). It is named after Myron J. Gordon of the University of Toronto, who originally published it along with Eli Shapiro in 1956 and made reference to it in 1959. Their work borrowed heavily from the theoretical and mathematical ideas found in John Burr Williams 1938 book 'The Theory of Investment Value.' The dividend discount model (DDM) 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. The equation most widely used is called the Gordon growth model (GGM). It is named after Myron J. Gordon of the University of Toronto, who originally published it along with Eli Shapiro in 1956 and made reference to it in 1959. Their work borrowed heavily from the theoretical and mathematical ideas found in John Burr Williams 1938 book 'The Theory of Investment Value.' The variables are: P {displaystyle P} is the current stock price. g {displaystyle g} is the constant growth rate in perpetuity expected for the dividends. r {displaystyle r} is the constant cost of equity capital for that company. D 1 {displaystyle D_{1}} is the value of the next year's dividends. The model uses the fact that the current value of the dividend payment D 0 ( 1 + g ) t {displaystyle D_{0}(1+g)^{t}} at (discrete ) time t {displaystyle t} is D 0 ( 1 + g ) t ( 1 + r ) t {displaystyle {frac {D_{0}(1+g)^{t}}{{(1+r)}^{t}}}} , and so the current value of all the future dividend payments, which is the current price P {displaystyle P} , is the sum of the infinite series