The dividend Growth Model is a model used to determine the intrinsic value of a share or stock. It is also called Gordon Growth Model for stock valuation or dividend discount model (DDM). The following formula is used to determine the stock value.
Formula
Where:
D1 = Next year expected dividend per share
Ke = annual rate of return
g = dividend growth rate
Example
ABC just paid a dividend of $ 5 per share. It is expected to grow @ 5 {1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} per annum, while the cost of equity or required rate of return is 12 {1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c}. Then,
Vo = 5 (1.05) / (0.12 – 0.05) = $ 75