Question

So called “H-Model” in stock valuation is a variant of the following model.

3-stage dividend discount model (DDM)

2-stage DDM

the Gordon model

Answer 1

“H-Model” in stock valuation is a variant of the 2-stage Dividend Discount Model.

Analysis and Explanation for answer:

The H-model is a quantitative method of valuing a company's stock price. It is similar to the Two-Stage Dividend Discount Model, but differs by attempting to smooth out the high growth rate period over time.

The H-model is used to assess and value a company stock. The model, similar to the dividend discount model, theorizes the stock is worth the sum of all future dividend payments, discounted to the present value.

One potential problem with the two-stage dividend discount model is that it assumes an initial high growth rate, then an abrupt drop-off in growth to the terminal growth rate when the company reaches stable growth. The H-model, instead, smooths out the growth rate linearly toward the terminal growth rate. It thus provides a more realistic approach in most scenarios for valuing a company’s stock.

Formula for H Model:

Stock Value = (D₀(1+g₂))/(r-g₂) + (D₀*H*(g₁-g₂))/(r-g₂)

Where:

• D₀ = The most recent dividend payment
• g₁ = The initial high growth rate
• g₂ = The terminal growth rate
• r = The Discount Rate
• H = The half-life of the high growth period