Final answer:
The Gordon Growth Model, also known as the Dividend Discount Model (DDM), is used to value stocks by estimating future dividends and discounting them back to the present. It is particularly useful for stocks with stable and predictable dividends. The model assumes a constant growth rate of dividends.
Step-by-step explanation:
The Gordon Growth Model, also known as the Dividend Discount Model (DDM), is a method used to value a stock by estimating the future dividends it will generate. It calculates the intrinsic value of a stock by discounting the expected future dividends back to the present using a required rate of return. The model assumes that dividends will grow at a constant rate indefinitely.
The Generalized Dividend Valuation Model is an extension of the Gordon Growth Model that allows for more complex dividend patterns, such as non-constant growth rates or dividend payments that are not perpetually growing. With this model, dividends are discounted back to the present using an appropriate discount rate that reflects the riskiness of the stock.
The Gordon Growth Model is particularly useful in valuing stocks that have a stable and predictable dividend stream, where the growth rate is relatively constant. It is commonly used for companies that have a history of paying dividends and are expected to continue doing so in the future.