Explain different types of dividend (Zero growth, constant growth / the Gordon

growth model and non constant growth model ) Valuation and stock valuation
at present value. 
  

Zero growth model:

A zero growth dividend is a dividend that pays a uniform dividend that does not experience
growth over time. Preferred shares are generally zero growth dividend paying securities.

Zero growth model formula:

P0 = Dividend
r
P= Price
r= required return

The formula for the present value of a stock with zero growth is dividends per period divided by
the required return per period. The present value of stock formulas are not to be considered an
exact or guaranteed approach to valuing a stock but is a more theoretical approach.
The present value of a stock formula used above is specific to stocks that have zero growth,
or no growth. It is important to remember that the period used for both dividends and the
required return must match. For example, if one is using annual dividends, then the annual
return must be used.

The Gordon Growth Model:

The Gordon Growth Model, also known as a version of the dividend discount model (DDM), is a
method for calculating the intrinsic value of a stock, exclusive of current market conditions. The
model equates this value to the present value of a stock's future dividends.
The model is named in the 1960s after professor Myron J. Gordon, but Gordon was not the only
financial scholar to popularize the model. In the 1930s, Robert F. Weise and John Burr Williams
also produced significant work in this area.
 

The variables are: P is the current stock price. g is the constant growth rate in perpetuity
expected for the dividends. r is the constant cost of equity capital for that company. is the value
of the next year's dividends.
The formula :

The Gordon model is a common name for the constant-growth model that is widely cited in
dividend valuation.

P= D1 / r-g

Non-constant growth model:

Nonconstant growth models assume the value will fluctuate over time. You may find that the
stock will stay the same for the next few years, for instance, but jump or plunge in value in a
few years after that. In that case, you can calculate for steady growth for those early years, then
estimate upward or downward movement at whatever point you see necessary.

Non-constant growth model formula: P0 = D0(1+g) / Ke - g

Valuation:

The valuation method is based on the operating cash flows coming in after deducting the
capital expenditures, which are the costs of maintaining the asset base. This cash flow is taken
before the interest payments to debt holders in order to value the total firm. Only factoring in
equity, for example, would provide the growing value to equity holders. Discounting any stream
of cash flows requires a discount rate, and in this case, it is the cost of financing projects at the
firm. The weighted average cost of capital (WACC) is used for this discount rate. The operating
free cash flow is then discounted at this cost of capital rate using three potential growth
scenarios—no growth, constant growth, and changing growth rate.

Valuation is the analytical process of determining the current (or projected) worth of an asset
or a company. There are many techniques used for doing a valuation. An analyst placing a value
on a company looks at the business's management, the composition of its capital structure, the
prospect of future earnings, and the market value of its assets, among other metrics.
Stock valuation at present value:

Stock valuation based on the dividend discount model typically takes one of three forms
depending on what pattern we expect the dividends to follow. These three model variations are
(1) the no-growth case, (2) the constant-growth case, and (3) the non-constant-growth (or
supernormal-growth) case. There are a couple of other variations, but these three provide a
solid foundation. 

The formula for the present value of a stock with constant growth is the estimated dividends to
be paid divided by the difference between the required rate of return and the growth rate.
The present value of a stock with constant growth is one of the formulas used in the
dividend discount model, specifically relating to stocks that the theory assumes will grow
perpetually. The dividend discount model is one method used for valuing stocks based on
the present value of future cash flows, or earnings.
As previously stated, the present value of a stock with constant growth is based on the
dividend discount model, which sums the discount of each cash flow to its present value.
The formula shown at the top of the page for stocks with constant growth uses the present
value of a growing perpetuity formula, based on the underlying theoretical assumption that
a stock will continue indefinitely, or in perpetuity. This assumption is not without scrutiny,
however the present value of a growing perpetuity can be used as a comparable measure
along with other stock valuation methods for companies that are stable and tend to have a
calculable outcome of steady growth.