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. […]
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 […]
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 […]
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 […]
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 […]
In this article, I will show you how to calculate and interpret stock and portfolio beta. Beta, as a measure of a stock or portfolio's volatility relative to the market, offers valuable insights into implied risk for investors. We'll explore the formula for calculating beta and provide detailed, step-by-step instructions on computing and interpreting this […]
In this article, I will guide you through estimating your required rate of return for stock valuations. Often referred to as the "discount rate," this figure represents the minimum return that an investor seeks to make an investment worthwhile. The discount rate essentially indicates the expected annual return from a stock, derived by discounting the […]
In this article, I will show you how to calculate and interpret the Arbitrage Pricing Theory (APT). Developed by economist Stephen Ross in 1976, the APT presents a multifactorial approach to asset pricing, which extends beyond the Capital Asset Pricing Model (CAPM). The CAPM is a fundamental model in finance that attempts to explain the […]
In this article, I will show you how to calculate and interpret the build-up method. This method is essential for determining the discount rate (aka required rate of return or capitalization rate) in absolute valuation models, such as the discounted cash flow (DCF) model. The discussion will also cover the advantages and limitations of using […]