This lesson examines the application of TVM and the cost of capital to equity valuation using the Dividend Discount Model (DDM) and the Gordon Growth Model. It covers the assumptions, calculations, and limitations of these models, as outlined in the IIMBx Corporate Finance syllabus .

• Equity Valuation Principles: The intrinsic value of a common stock is the present value of its expected future cash flows. The IIMBx syllabus identifies stock price, dividends, return, and multiples-based evaluation as core topics .

• The Dividend Discount Model (DDM): This model values a stock as the present value of all expected future dividends. The DDM is most suitable for dividend-paying stocks where the company has a discernible dividend policy linked to profitability.

• The Gordon Growth Model (Constant Growth DDM): Assumes dividends grow at a constant rate forever. The formula is:

  • V0 = D1 / (r – g) where g is the constant dividend growth rate and r is the required rate of return. The model is highly sensitive to the growth and required return assumptions.

• Multistage Dividend Discount Models: For companies with varying growth rates (high growth in early years, stable growth later), multistage models are used. The two-stage DDM, the H-model, and the three-stage DDM provide different approaches to modelling this growth pattern.

• Valuation Principles in Global Context: The core purpose and principles of valuation include understanding key financial principles like time, risk, and return, as well as valuation standards used in practice . These include Fair Market Value (FMV), Fair Value (FV), Investment Value (INV), and Intrinsic Value (IV) .