Corporate Finance & Valuation Lab

Dividend Discount Model (DDM) Calculator

Model stock intrinsic value with Gordon Growth, Two-Stage DDM, H-Model, sustainable growth rates, and cost of equity sensitivity.

Valuation Engine Sensitivity Heatmap DDM Valuation Theory FAQ

Valuation Archetypes

Load calibrated equity research benchmarks.

Step 1: Configure Dividend Cash Flows, Discount Rate & Growth Models

Equity Valuation Inputs

Select dividend trajectory pattern.
$
Latest 12-month trailing dividend paid.
$
Current traded market stock price.
%
Discount rate from CAPM (Rf + Beta x ERP).
%
Terminal sustainable GDP/inflation growth rate.

Fundamental Sustainable Growth Calculator

%
%
Intrinsic Value per Share
$103.50
Estimated fair value
Margin of Safety
+8.9%
Undervalued vs. $95.00 price
Market Implied Cost of Equity
8.40%
Discount rate priced in by market
Sustainable Growth Rate (g)
7.20%
ROE x (1 - Payout Ratio)

Valuation Sensitivity Heatmap (Intrinsic Value $)

Evaluates intrinsic equity valuation across varying required discount rates (r) and terminal growth rates (g).

Fundamental Equity Valuation

Principles of Dividend Valuation

Key financial theory governing the Dividend Discount Model:

  • Cash Flow Primacy: An equity investor's true cash flows are cash dividends received during holding and the ultimate liquidation price.
  • The Cost of Equity Hurdle: The discount rate $r$ must reflect risk-free treasury yields plus systemic beta risk: $r = R_f + eta cdot ext{ERP}$.
  • H-Model Transition: In competitive markets, high returns on capital attract competition, causing supernormal growth rates to decay toward economic GDP growth.
  • Margin of Safety: Value investors demand a 15% to 25% discount between market price and intrinsic value to protect against model parameter error.

Calculate cost of equity in the CAPM & Cost of Equity Lab.

Mathematical Formulation

Dividend discount formulas

P_0 (Gordon) = [ D_0 × (1 + g) ] ÷ ( r - g )

P_0 (Two-Stage) = ∑ [ D_t ÷ (1 + r)^t ] + [ P_n ÷ (1 + r)^n ]

P_0 (H-Model) = [ D_0(1 + g_n) + D_0 × H × (g_a - g_n) ] ÷ ( r - g_n )

Sustainable_g = ROE × ( 1 - Payout_Ratio )

r_implied = ( D_1 ÷ P_market ) + g

Decompose equity returns in the DuPont Analysis Lab.

FAQ

Dividend discount model & equity questions

What is the Dividend Discount Model (DDM) and Gordon Growth Model?

The Dividend Discount Model (DDM) values an equity share as the present value of all its future expected cash dividend payments. The Gordon Growth Model assumes dividends grow perpetually at a constant rate g: P0 = D1 / (r - g), where r is the required rate of return.

When should I use Two-Stage DDM vs. the H-Model?

Use Two-Stage DDM when a company experiences high supernormal growth for a fixed period before suddenly shifting to mature growth. Use the H-Model when growth gradually and linearly declines from a high rate to long-term sustainable growth as competition increases.

How is the fundamental Sustainable Growth Rate calculated?

Sustainable Growth Rate (g) = ROE x (1 - Payout Ratio) = ROE x Retention Ratio (b). It measures how fast a firm can expand earnings without raising external equity.

Why does the Gordon Growth Model fail if r is less than or equal to g?

If the dividend growth rate exceeds the cost of equity (g >= r), the denominator becomes zero or negative, resulting in infinite or nonsensical intrinsic value. In reality, no firm can grow faster than the broader economy indefinitely.

Can I export the DDM valuation and sensitivity matrix to CSV?

Yes. You can export complete intrinsic value estimates, model parameters, Margin of Safety comparisons, and the 7x5 discount rate sensitivity matrix as a UTF-8 CSV spreadsheet with formula defense.

Continue Exploring Corporate Finance & Valuation Tools

Explore our Cash Flow & Finance Hub, model capital costs in the CAPM Lab, calculate corporate hurdle rates in the WACC Lab, analyze private equity buyouts in the LBO Lab, or model DCF cash flows in the Business Valuation Lab.