Pricing the Stock Through DDM

Topic 1 – Costant Discount Model

This model assumes that there will be no growth in the dividend paid by the company and the company will
pay the same dividend every year. This means that there is a 100% Dividend payout ratio and no retention of
dividends.

Imitations:

 It does not take into account non dividend factors such as brand loyalty, customer retention and the
ownership of intangible assets, all of which increase the value of a company.

Topic 2 – Constant Growth Rate Model (Gordon Model)

A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a
constant rate. This model assumes the constant growth rate over the long term .

Imitations:

 Applicable to those firms which pay dividend

 Applicable only to those firms that are growing at a steady growth rate
 If the growth rate is equal to the required rate of return the price of the stock approaches to infinity
 The Gordon Growth Model also relies heavily on the assumption that a company's dividend
growth rate is stable and known.

If a stock does not pay a current dividend, such as growth stocks, an even more general version of the Gordon
Growth Model must be used, with an even greater reliance on assumptions (Zero Growth Model). The model
also asserts that a company's stock price is hypersensitive to the dividend growth rate chosen and the growth
rate cannot exceed the cost of equity, which may not always be true.

Topic 3 – Growth Rate vs ROE Relationship

 Higher the ROE the better the valuation will be
 Growth Rate higher the better but shouldn’t exceed Ke
 Growth Rate = Ploughout Ratio * ROE (Direct Relation)

Our Analysis

 According to Constant growth Rate Model/ Zero Growth Model

 All the Stocks valuations are undervalued that of current market price
 Because the Divided Payout alone Cannot Explain the Value of the stock
 Also, P/E ratio Cannot be considered to Value the Stock (as it fails when re investment is considered)
 We have taken FCFF for the firm as and the growth rate is more than ke (Which makes the Value to
negative)