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Discuss how we can use the Dividend (Gordon) Growth model to indicate the intrinsic value of...

Discuss how we can use the Dividend (Gordon) Growth model to indicate the intrinsic value of company shares. Be sure to provide as part of this discussion certain assumptions we can make regarding the growth and the required rate of return to be used in this analysis and limitations of utilizing this model for valuation purposes.

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Answer #1

Dividend discount model is used to find the intrinsic value of the equity of the firm

Formula is D1/(k-g)

Where D1 is dividend for first year

K is cost of equity

And g is growth

Assumptions

Dividends will be payed in perpetuity

Growth is constant and dividends will grow till perpetuity

Growth rate is less than cost of equity

The above mentioned assumptions are the limitations of this model. And it is unable is find the Value of non dividend paying stock and also disregards buyback of shares

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