Dividend Growth Model

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Definition: Dividend Growth Model

It is a technique to value the price of a share based on its dividend and growth rate. It is similar to dividend discount model but the difference is that the growth rate is also factored in the dividends.

It is based on an assumption that the future dividends grow at a constant rate. It is assumed that company maintains a fixed dividend policy and increases dividends accordingly.

It is generally used to value the shares of a “MATURED” company where constantly growing dividends are observed.

Price of Share:      D0 (1+g)

                                    (R – g)

Here D0 = Current Dividend

R = Rate of discount

g = Growth rate

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