Lesson 4 of 8 · 14 min

Valuing shares with dividend discount models

A share is worth the present value of all the dividends it is expected to pay, and the growth pattern you assume decides which formula to use.

In short

Equity has no maturity, so its value is the PV of expected dividends forever, discounted at the required return r.
Constant dividend (e.g. preferred stock): $PV = D/r$ .
Constant growth (Gordon): $PV_0 = D_1/(r-g)$ with $D_1 = D_0(1+g)$ . It needs $r > g$ .
Changing growth (two-stage): discount each high-growth dividend, then add the terminal value $D_{n+1}/(r-g_L)$ discounted n periods.
Value rises with expected growth and falls with the required return.

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