the company's cost of equity capital g the constant growth rate for dividends, in perpetuity. For example, what if you only want to hold the stock for 1 year, 5 years or 10 years? A stock is worth the present value of all the dividends ever to be paid upon sports direct discount it, no more, no less. Some properties of the model edit a) When the growth g is zero, the dividend is capitalized. The equation most widely used is called the.
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Its variables include the dividend per share, the discount rate (also the required rate of return or cost of equity) and the expected rate of dividend growth. John Burr Williams 1938 book the Theory of Investment Value. The company expects dividends to grow in perpetuity at 5 per year, and the company's cost of equity capital. People invest in companies with the intention of getting their money back and then some. Gordon growth model (GGM). The dividend discount model is a good starting point for valuing a stock since the model encourages investors to think about the relationship between risk, returns and growth. Examples of the DDM With Stable Growth. That's because once a company reaches its "mature" stage it won't need to reinvest in its growth, so management can begin distributing cash to the shareholders. Home article glossary calculator about us books. Whether or not any rich men were involved, the change is logical in the sense that companies that ought to be paying dividends will no longer have a disincentive for doing so out of concerns for the tax consequences to their shareholders.