![]() The Gordon Growth Model assesses the reason of dividend growth. See also What If the Dividend Payout Ratio is More Than 100? All You Need to Know The Gordon Growth Model ![]() When dividends grow at a constant rate the value of stock is the present value of a growing cash flow. Where there is greater uncertainty, the greater required rate of return is required. The required rate of return indicates the time value of money for the uncertainty of the future cash flows of the investment. P 0 = The current ex dividend share priceĭ 0 = The dividend that has just been paid or will be paid The formula for the dividend valuation model is: Shareholders pay for the current share price and acquire the shares with the expectation of future dividends. The time value of money principle can determine the present value of a stock based on the discounted value of future cash flows. The basic valuation is that in a rational market stock value is the present value of all future cash flows that the investor expects to receive. Different dividend valuation models are described below: The Basic Valuation Model The benefit of dividend valuation models is dividends are used to value the company and this is not total value because debt is not included. To determine the overall value of a stock dividend valuation models are used. It is difficult to determine the value of the common stock because the future cash flows generated by dividends are not fixed. When the stock is sold, the investor expects to receive the value of the stock. When an investor pays for buying common stock, he expects to receive future cash flows in the form of dividends.
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