Daily Intrinsic Value Updates in the Gordon Growth Model

Summary

The document presents the Gordon growth model for valuing a dividend-paying stock, with growth derived from return on equity and the retention ratio. It asks how to update intrinsic value day by day when the last annual dividend was paid the previous day. The proposed approach increases the value daily using a fraction of the annual discount rate.

No calculation, market evidence, or resolved method is supplied; the text is a question about whether daily compounding is appropriate or whether another discount-rate adjustment would better represent the passage of time. Its setup assumes constant growth and discount rates and annual dividend payments. It does not discuss changes in fundamentals, dividend timing conventions beyond the stated example, or how to handle uncertainty in growth and required return.

Key ideas

• The Gordon model values a stock using its next dividend, growth rate, and discount rate.
• The document derives growth from return on equity and the fraction of earnings retained.
• It proposes increasing estimated value each day using a daily portion of the annual discount rate.
• The document asks whether this daily update is appropriate but gives no answer or supporting evidence.

Tags

# Calibration of stock's intrinsic value under the gordon model


# Calibration of stock's intrinsic value under the gordon model












Assume we have the constant growth Gordon model, for a stock paying dividend $D$,Earnings per Share $EPS$, annual growth rate $g=ROE*(1-\frac{D}{EPS})$ and discount rate $r$. Then:

$IV=\frac{D*(1+g)}{r-g}$. In this particular case, we consider that dividends are being paid 1 year from now. My though on this:

Assume that last dividend was paid yesterday, annual payments. Then today: $IV_0=\frac{D*(1+g)}{r-g}$ Tommorow: $IV_1=IV_0*(1+\frac{r}{365})$ in 2 days, $IV_2=IV_1*(1+\frac{r}{365})$ ...

Is the a better method of estimating daily IV, adjusting to a different discount rate?

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.