Stock Valuation -- DDM

Dividend Discount Model and Gordon Growth Model analysis

Model Parameters

$2.00
3.00%
10.00%
Gordon Growth Model:
P = D1 / (r - g)

where D1 = D0 * (1 + g)
Next Dividend (D1) $2.06
Intrinsic Value $41.20
Key Assumptions:
  • Dividends grow at constant rate g forever
  • Required return r > growth rate g (otherwise model breaks down)
  • Assumes the company will pay dividends indefinitely
  • Works best for mature, stable companies (utilities, blue chips)

Projected Dividends

Value Drivers: Higher D0 or g increases value. Higher r decreases value. The "spread" between r and g is critical -- wide spreads support high valuations.

Stock Price Sensitivity: Required Return (rows) vs Growth Rate (columns)

This sensitivity table shows how the intrinsic value changes across different scenarios. Notice the high sensitivity -- small changes in r or g create large swings in valuation.

Two-Stage DDM

Some companies have high growth initially, then slower terminal growth. This model assumes higher growth for N years, then switches to constant terminal growth.

5
12.0%
PV of High-Growth Dividends $8.50
Terminal Value (PV) $32.70
Total Value $41.20