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Dividend Growth Models

Valuation of  a stockDividend growth models are one of the most popular methods used for the stock valuation.They calculate the future value of the stock by considering its future growth and future dividend payments.They are used by  stock analysts and stock investors to select a best stock for  investment.If we talk about the dividend growth models,there are basically two types of dividend growth models i.e. Constant dividend growth model and multi stage dividend growth model.

(1) Constant Dividend Growth Model

In constant dividend growth model,we assume a constant dividend growth rate and in this method investor’s required rate of return is also known.As we know in reality,mostly companies don’t have constant growth rates,so these types of models can  only be used for financially stable and strong companies.It can be calculated by the following formula :

P=D/k-g

Here :

P = Value  of the stock , D=dividend payout rate, K=Required rate of return and g=Projected growth rate of the dividend

(2) Multi-stage Dividend discount Model

In constant dividend growth model,we don’t assume a constant dividend growth rate ,but in this method investor’s required rate of return is known.So we can say this method is more realistic than the constant growth dividend model.

It can be calculated by the following formula:

P=D(1+g)/(1+k) + D(1+g)(1+g)/(1+r)(k-g)

Here :

P = Value  of the stock , D=dividend payout rate, K=Required rate of return and g=Projected growth rate of the dividend

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About Emaad Qureshi