Dividend discount model

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In financial economics, the dividend discount model (DDM) is a method of valuing the price of a company's capital stock or business value based on the assertion that intrinsic value is determined by the sum of future cash flows from dividend payments to shareholders, discounted back to their present value.^[1][2] The constant-growth form of the DDM is sometimes referred to as the Gordon growth model (GGM), after Myron J. Gordon of the Massachusetts Institute of Technology, the University of Rochester, and the University of Toronto, who published it along with Eli Shapiro in 1956 and made reference to it in 1959.^[3][4] Their work borrowed heavily from the theoretical and mathematical ideas found in John Burr Williams 1938 book "The Theory of Investment Value," which put forth the dividend discount model 18 years before Gordon and Shapiro.

When dividends are assumed to grow at a constant rate, the variables are: ${\displaystyle P}$ is the current stock price. ${\displaystyle g}$ is the constant growth rate in perpetuity expected for the dividends. ${\displaystyle r}$ is the constant cost of equity capital for that company. ${\displaystyle D_{1}}$ is the value of dividends at the end of the first period.

${\displaystyle P={\frac {D_{1}}{r-g}}}$