Dividend Growth

Model
BY UMAIMA HAFEEZ
Definition

Dividend growth model is a valuation model, that calculates the fair

value of stock, assuming that the dividends grow either at a stable
rate in perpetuity or at a different rate during the period at hand.
Basic Formula

Here,
Po = Value of common stock
Dn = Per share expected dividend at the end of time n
r = Required return on common stock
Example
Example: ABC Company is expected to pay annual dividend of Rs. 5, 10, 15, 20, 25, 30, 35, 40,
45, 50 per share for next 10 years. If the appropriate discount rate is 10% What is the value of
the common stock?
Solution
Growth Models
1. Zero Growth Model

The zero-growth model assumes that the dividend always

stays the same, i.e., there is no growth in dividends.
Therefore, the stock price would be equal to the
annual dividends divided by the required rate of return.
Formula
Example
2. Constant Growth Model

It assumes that a company's dividends are going to continue

to rise at a constant growth rate indefinitely. You can use that
assumption to figure out what a fair price is to pay for the
stock today based on those future dividend payments.
Formula
Example
3. Variable Growth Model

The variable-growth model is a dividend valuation approach

that allows for a change in the dividend growth rate. The
growth rate in this approach vary for years.
Formula
Example
Thank you