Deriving the Gordon Growth Model (GGM) formula

[@ericmbulwe]

I literally just signed in to appreciate you. I searched and searched but nothing made sense until your video. Thank you and may God bless you!

[@FabianMoa]

You're welcome, Eric! Always glad that my videos have helped others in any way possible.

[@ethansmith104]

Over two and a half years later, this video is still helping so much. Information-dense classes often teach *what* to do, but not *why.* Knowing the *why* is necessary for me to be able to remember what to do, so thank you very much for posting the video! This explained a lot and is definitely going to help me get through my current finance class.

[@FabianMoa]

Great to hear, Ethan!

[@rafrans4206]

Really appreciate a video that helps me understand a concept with just one playthrough, thank you for the clear and easily understandable explanation

[@FabianMoa]

Glad it helped!

[@jeswin297]

A regular viewer of your channel sir , great teaching with all respect from India

[@yashdhanwani8808]

In 2018 I asked this from my professor she straight forward said I don't know. Than asked from another professor who is an Indian CFA. He laughed and didn't replied anything said it's a formula 😅 I said I know this sir, the question is why we are deducting g from denominator. Today I got the answer in 2020 Thanks a ton you are a brilliant next level

[@FabianMoa]

Thanks, yash! Glad the video was helpful

[@tammanaseshamanikanta217]

Thank you. This is the video I am looking for.

[@FabianMoa]

You're welcome!

[@thinktank6247]

Excellent Sir !!

[@immortalpuffin6643]

Is S_inf = A/(1-R) because we know g < r, i.e. (1+g)/(1+r) < 1? This is the only way this would make sense, as R would become zero in the limit. Just want to make sure I'm following the derivation correctly.

[@FabianMoa]

Yes, it only applies if r > g

[@SankoReborn]

BIG HELP, THANK YOU FABIAN!

[@FabianMoa]

You're welcome, Kaluli

[@meetbhavsar1072]

thank you sir 😇

[@Jeffkingson]

Really great explanation. Thank you so much!

[@FabianMoa]

You're welcome!

[@vinayakpawar2965]

Thank you soo much sir 🙏

[@zqc8250]

Hi , at around 2:30 did you assume R is less than 1? If so, why? I don’t see why R^n needs to be 0.

[@zqc8250]

Or does that mean the formula is only effective when g

[@FabianMoa]

Yes, R < 1. Or r > g

[@FabianMoa]

Yes

[@zqc8250]

@@FabianMoa Oh man I was being stupid obviously the function was going to be diverged if. g>r

[@isaiahchua1776]

thank you so much! very helpful

[@FabianMoa]

You're welcome 😎

[@JANE-zc4dm]

Hello! Thanks for your teaching! May I ask you a question? Which is during the time 2:36, could you explain why "A+AR+AR²+...+ARⁿ⁻¹=A(1-R)ⁿ/(1-R)"? Please! Thank you so much!

[@FabianMoa]

It is the formula for the sum of a geometric series. **Hope the workings below properly** (1) ---> Sn = A + AR + AR^2 + ... + AR^(n-2) + AR^(n-1) (2) ---> R*Sn = AR + AR^2 + AR^3 + ... + AR^(n-1) + AR^n (1) - (2): Sn - R*Sn = A - AR^n (1 - R)*Sn = A(1 - R^n) Sn = A(1 - R^n)/(1 - R)

[@auronnoashraf3767]

Thank you sir

[@finecon8391]

Excellent

[@Sssssamuel]

God bless you sir. god bless ya hella lot

[@FabianMoa]

Thanks, Samuel!

[@vinbat1990]

Thanks a lot..

[@hariharan7991]

awesome

[@FabianMoa]

Thank you! Remember to subscribe to my channel for more related videos.

[@rupomhazarika]

Thank you much.. I was looking for this derivation 😇

[@FabianMoa]

You're welcome, Rupom 👌

[@Algoritmus_ai]

Hello! Please, can you explain based in what theory do you divide the dividends calculation (Do, D1..), per (1+r), (1+r)^2, respectively. I know the "r" is the rate of return, but why should we divide, not subtract, for example. And talking about each of these fractions, what each of them mean in the Sum? Thanks!

[@FabianMoa]

Hi Julio, It's based on the concept of compounded interest. A cash of $100 that you invest today at 5% per annum becomes $100(1.05) = $105 in one year and then becomes $100(1.05)^2 = $110.25. In other words, a future cash flow of $110.25 in two years time is worth $100 today if the discount rate is 5% per annum. So in the case of the future dividends, when we discount the dividends by r, we are calculating the value of the future dividends in present terms (i.e. today). The assumption used here is the stock's intrinsic value is the sum of the present values of the future dividends. When we sum up all the fractions (i.e. the present value of all dividends), it gives us the intrinsic value of the stock. Hope it helps.

[@aswinskumar8012]

Thank you so much sir.

[@TheMegaTushar]

Why is D0 not taken as A of the geometric progression ?

[@FabianMoa]

D0 is in the past. We only take future cashflows

[@sophieazaurashvili344]

Hello, First of all thank you for providing this video. It is helpful. On the other hand, please, can you explain why we divide Do(1+g)/(1+r)? It'c clear that each year we are going to get grown dividend, but on the other hand why we divide this income to the rate of return ? Thank you in advance

[@FabianMoa]

Hi Sophie, All the dividends are in the future. For valuation, we need to find the value of the future dividends in present terms (i.e. now). To do that, you will have to discount these future dividends at a rate that is equals to the shareholder's required rate of return (i.e. the r in this case) For example, if the share pays a dividend of $1.12 in Year 1 and the shareholders have a required return of 12%, that means the shareholders value the Year 1 dividend at $1.12/(1+0.12)^1 = $1 in present terms (i.e. they are willing to pay $1 now to receive $1.12 in 1 year's time). Hope it clear things up. Cheers.

[@raynaah]

what is r in 1+r ?

[@FabianMoa]

It's the discount rate, which represents: - required return to shareholders - cost of equity to company

[@raynaah]

@@FabianMoa Thank You so much for the great vid and help

[@pratikrajput8151]

Thanks. I was stuck at GP.

[@FabianMoa]

You're welcome!