Posts tagged: present value

Absolute Equity Valuation, Part III: Gordon Growth Model

Myron J. Gordon

Myron J. Gordon 1920 - 2010

Introduction:

In part-2 of this series we applied the concept of the present value of all future cash flows in the form of the dividend discount model. A variation of this is called the Gordon Growth Model 1 which deals with the infinite summation problem more directly.  

The Gordon Growth Model (GGM):  

The summation in the present value model is an infinite geometric series. It can be mathematically transformed 2 into what is known as the Gordon Growth Model, or GGM for short. Although cash flow can be represented by several measures, let’s use dividends for illustration purposes.  

Gordon Growth Model, formula 1

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Absolute Equity Valuation, Part II: Dividend Discount Model

Introduction: 

In part-1 of this series, we discussed the concept that a stock’s intrinsic value is the present value of its cash flows. Here in part-2 we will introduce the general form of the present value model, and discuss the dividend discount model in more detail. 

The present value model discounts all future cash flows to determine a stock’s present value, V0, which is its intrinsic value at t=0. Discounting all future cash flows necessitates using the infinity sign (∞) in the summation. The foundational formula for the present value model is: Read more »

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