Gordon growth model vs residual income model
Hi, I’m a little bit confused when I was studying dividend discount model and residual income model. These two ways of valuation should lead to the same intrinsic value of the same stock. In residual income model, intrinsic value= current book value+ present value of future residual income. However, in dividend discount model, intrinsic value= present value of future dividends. Why do we not add current book value in dividend discount model? In my way of thinking, dividend discount model only measures future profitability of the stock, without accounting for the ownership value of the firm. Is the stock valuation based on DDM baised?
Study together. Pass together.
Join the world's largest online community of CFA, CAIA and FRM candidates.