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Author:
Abdulnasser Hatemi-J, Department of Accounting and Finance, College of Business and Economics, UAE University, Al Ain, The United Arab Emirates

Coauthors:
Youssef El-Khatib, Department of Mathematical Sciences, UAE University. Al Ain, The United Arab Emirates

The Dividend Discount Model with Multiple Growth Rates of any Order for Stock Evaluation

Volume 76 - Issue 1, February 2023
(pp. 135-146)
JEL classification: G12; C00
Keywords: Stock Evaluation; The Dividend Discount Model; Multiple Growth Rates; Closed Form Solution

Abstract

The dividend discount model (DDM) is regularly used for stock evaluations. However, in the existing literature the solution of this model exists only for a couple of different growth rates. The current paper provides a general solution for the DDM to compute the intrinsic value of a common stock that allows for multiple stage growth rates of any predetermined number of periods. A mathematical proof is provided for the suggested general solution. A numerical application is also presented. The solution introduced in this paper is expected to improve on the precision of stock valuation, which might be of fundamental importance for the individual investor as well as for financial institutions.


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