Gordon Dividend Growth Model

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DIVIDEND GROWTH MODEL Valuation of a business consists of various processes that require a deep understanding of a business such as, forecasting performance, selection of an appropriate valuation model, which will in turn help to determine whether or not to purchase. THE CONSTANT DIVIDEND GROWTH MODEL This is also referred to as the Gordon Dividend Growth Model. Which fall in a class of models referred to as Dividend Discount Models (DDM). It is taken that the value of stock today is the present value of all future cash flows on that stock. Hence determining the price (intrinsic value) of stock is based on the discounted value of future cash flows. Given that dividends are constant all through, then the value of a share of stock I the present…show more content…
There are 3 main types of dividend policies, namely: Regular Dividend Policy: This is a policy that is based on the payment of a fixed dollar payment in each period. It is when dividends are paid at a usual rate. The owners are usually provided with positive information hence reducing the uncertainty.in this dividend policy dividends are usually never decreased. It is usually preferred by the economically weak people of the society such as retired people, widows and others. Such kinds of dividends are only maintained by companies with stable or regular earnings. Some of the advantages of using this policy are: It creates confidence among the shareholders Aids in stabilizing the market value of the shares. Gives regular income to the shareholders. Helps in steeping the goodwill of the company. Constant Payout Ratio Dividend Policy: This policy involves the use of the constant payout ratio. This ratio represents the percentage of dividend that is distributed to the shareholders per dollar in the form of cash. The amount of the dividend in such a policy fluctuates in direct proportion to the earnings of the…show more content…
These laws are: A firm’s capital cannot be used to make dividend payments (capital impairment restriction) Dividends must be paid out of a firm’s present and past net earnings (net earnings restriction) Dividends cannot be paid when the firm is insolvent (insolvency restriction) Capital impairment restriction: In some states, capital is defined as including only the par value of common stock. In others, capital is more broadly defined to also include the contributed capital in excess of par account sometimes called capital surplus. Net Earnings Restriction: requires that a firm have generated earnings before it is permitted to pay any cash dividends. This prevents the equity owners from withdrawing their initial investment in the firm and impairing the security position of any of the firm’s
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