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How to Value Companies Using the Two-Stage Dividend Discount Model

In this article, I will demonstrate how to use the Two-Stage Dividend Discount Model (DDM) to value dividend-paying stocks. This model is a refined version of the traditional dividend discount approach, incorporating two distinct phases of dividend growth: initially, a phase of irregular or extraordinary growth, followed by a phase of stable growth into perpetuity. […]

How to Apply the Gordon Growth Model (GGM) for Dividend Discount Valuation

In this article, I will show you how to apply the Gordon Growth Model (GGM) for dividend discount valuation. Named after American economist Myron J. Gordon, who popularized the model in the 1960s, the GGM is used to estimate the intrinsic value of a stock. It calculates the present value of a future series of […]

How to Apply the H-Model for Dividend Discount Valuation

In this article, I will show you how to apply the H-Model for dividend discount valuation. The H-Model, introduced by Fuller and Hsia in 1984 through their seminal paper "A Simplified Common Stock Valuation Model," builds upon the Gordon Growth Model (GGM). It is a two-stage model where the initial phase features a declining growth […]

How to Estimate the Perpetual Dividend Growth Rate in Dividend Discount Models

In this article, I will show you how to estimate the perpetual dividend growth rate in dividend discount models. A key and sensitive input in these models, the perpetual dividend growth rate is the expected rate at which a company's dividends will grow indefinitely. It's essential to accurately estimate this rate as it significantly influences […]

Why the Weighted Average Cost of Capital (WACC) is Flawed as the Discount Rate

In this article, I will discuss why the weighted average cost of capital (WACC) is flawed as the discount rate, and what individual investors can use instead to discount future cash flows in a present value calculation. The WACC is a calculation of a firm's "cost of capital," which is the weighted average of a […]

Importance of the Margin of Safety in Stock Valuations

In this article, we'll discuss the importance of the margin of safety in stock valuations. At its core, the margin of safety involves the practice of purchasing stocks at a price lower than their intrinsic value, essentially providing a cushion against assumptions, errors in estimation, or unforeseen market fluctuations. This principle not only underscores the […]

How to Calculate and Interpret the Capital Asset Pricing Model (CAPM)

In this article, I will show you how to calculate and interpret the capital asset pricing model (CAPM). The CAPM is often used to calculate the cost of equity (re), which is common practice when calculating the Weighted Average Cost of Capital (WACC) for company projects or for stock market investors attempting to estimate the […]