Model intrinsic equity value using Gordon Growth, Two-Stage supernormal expansion, the Fuller-Hsia H-Model, implied cost of equity, and discount rate sensitivity matrices.
| Year | Period Type | Projected DPS ($) | Discount Factor (1/(1+r)^t) | Present Value (PV) ($) | Cumulative PV ($) |
|---|
Gordon Growth intrinsic value ($/share) across varying discount and perpetuity growth rates.
Two-Stage DDM intrinsic value ($/share) across initial supernormal growth rates and stage durations.
The Gordon Growth Model represents the gold standard for mature cash cows with stable retention, while the H-Model captures the natural erosion of competitive advantage over time.
A positive Margin of Safety shields investors against forecasting errors in perpetual growth rates or unforeseen increases in the market equity risk premium.
The Dividend Discount Model (DDM) values an equity share as the present value of all its future expected cash dividend distributions. The Gordon Constant Growth Model assumes dividends grow perpetually at a constant rate g: P0 = D1 / (r - g), where D1 is the next year expected dividend and r is the investor required rate of return or cost of equity.
Use Two-Stage DDM when a company experiences high supernormal growth for a fixed discrete period (e.g. 5 years) before abruptly transitioning to long-term mature growth. Use the H-Model when growth declines gradually and linearly over time as industry competition intensifies and excess economic rents dissipate.
If the dividend growth rate equals or exceeds the discount rate (g >= r), the denominator (r - g) becomes zero or negative, yielding an infinite or mathematically nonsensical negative valuation. Economically, no single corporation can expand its cash dividends faster than the broader economy indefinitely without eventually consuming all global wealth.
The fundamental Sustainable Growth Rate is computed as g = ROE * (1 - Payout Ratio). If a company pays out 100% of its earnings as dividends, retention is zero and sustainable organic growth is 0%. The DDM demonstrates how higher retention allows reinvestment that fuels compound dividend growth.