Buy/Sell Decision Based on The Gordon Growth Mode (Dividend Discount Model)

Valuation of Securities
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Valuation of Securities
The Gordon Growth Model is also called the Dividend Discount Model (DDM). Indeed, it evaluates a firm’s publicly traded stock value by summing up all the values of the expected dividend payments in the future. DDM values the stock by using the net present value (NPV) of the expected future dividends (Shiller, 2014). Besides, it is the commonly used model when it comes to calculating the share price since it is easy to understand. However, an individual might not be convinced to make a buy or sell decision based on the Gordon Growth Model.
The Gordon Growth Model’s assumptions make it challenging for a person to rely on it when buying or selling stocks. First, it assumes that a share’s value of a stock is equal to the present value of the future dividends (Gitman & Zutter, 2014). In other words, the model perceives as if a firm grows at an unchanging or constant rate. Second, it assumes that the...