Valuation of Equities

In this chapter, we explore the valuation of equities using various dividend discount models. The valuation models discussed in this chapter apply to equities that pay dividends. Hence, we discount these dividends to derive their present or future values. Again, as with the previous chapter, the time value of money concepts discussed in Chapters 2 and 3 are key to valuing dividend-paying equities. The chapter begins by discussing the valuation of equities that pay fixed and growing dividends for limited and indefinite holding periods. This is followed by a discussion of the value of ordinary shares using the constant growth dividend discount or Gordon-Shapiro Dividend Valuation model. The chapter then discusses using the modified constant growth dividend discount model to value ordinary shares. The chapter concludes with a discussion of the valuation of ordinary shares using two-stage growth, the H-Model, and three-stage growth dividend discount models.