There are two main approaches to equity valuation. The first is using discounted cash flow techniques and the second is using relative measures (e.g. price/earnings and price/book value ratios). The first method we look at is the dividend discount model which is when we consider the value of the cash flows (dividends) that are paid to the equity investor.
This model values equities as the present value of future dividends to be paid to the investor.
If it can be assumed that:
Then the equation can be simplified to:
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