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). This two-stage model begins with an initial phase characterized by an extraordinary 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 […]
In this article, I will show you how to calculate and interpret the Single Index Model (SIM). The SIM claims that the returns on a stock are driven largely by its sensitivity and responsiveness to the returns on the market index. For investors interested in asset pricing, understanding the SIM is important, given that it […]