The premises of earnings-based business valuation are:
- It is assumed that the company will continue its operations (“going concern principle”)
- Taxation has no impact on the investment decision
- The reinvestment rate of return equals the alternative rate of return
- The goal is to maximize wealth
Dividend discount model (DDM)
The dividend discount model (DDM) is a popular method for determining the value of a stock. Using the dividend discount model, a stock’s value can be derived from a company’s distributed earnings in the form of dividends.
Gordon growth model (GGM)
The Gordon growth model (GGM) is a financial model used to calculate a company's intrinsic value, assuming constant dividend growth. It is one of the simplest methods for calculating the fair value of an investment.
H model
The H model is used to value companies that experience high growth at the beginning of the valuation period, which subsequently declines at a linear rate until a normal rate is reached.
Author
Günther Kornfellner, CFA, CAIA
Derivate Trader, Bybit EU