 when an investor buys the security of any company and intends to hold it for one year at least, then the intrinsic value of this stock is basically the sum of present value of all the associated year end dividends on this particular stock and the stock price at the end of the year. Now, we know that we are using the expected values of future dividends and the future sale price of the stock because these are unknown at present and with no certainty these can be used in our stock valuation analysis. So, we take these values at some estimates what dividend discount model is. We see that a shares intrinsic value is the present value of its all future dividends and its future sale price. So, V0 is equal to D1 plus P1 divided by the capitalization rate. Now, to estimate year end price P1, we need to determine the intrinsic value at the end of the year and that intrinsic value at the end of the year is termed as V1. Now, V1 is equal to dividend expected at the end of the second year plus sale price of the stock expected at the end of the second year. Both of these are summed and are divided by the capitalization rate. This means that to determine P1, we need to have the intrinsic value at the end of year 1 which is basically associated with the expected dividends and expected sale price at the end of year 2. Now, if we assume that V1 is equal to P1, then P1 can be described as that V0 is equal to D1 plus D1 over 1 plus K and that is basically the present value of the expected dividend at the end of year 1. Now, we need to add D1 D2 plus P2 divided by the capitalization rate. This means that when we need to determine the V1 assuming it equal to P1, we will be having two values. The first is D1 and the second is sum of D2 and P2. Now, we need to divide these two variables over the capitalization rate. In this way, we will be determining the intrinsic value related to the first year. In similar way, V0 for H or holding period can be obtained where V0 is equal to D1 over capitalization rate plus D2 over capitalization rate plus D3 over capitalization rate and plus the holding periods dividend include with the holding periods sale price over the capitalization rate. So, this means that how many holding periods we have, we need to capitalize the individual years dividend till the holding periods dividend and the holding periods sale price and the summation of the present value of all these cash flows will be termed as the intrinsic value at time zero which is termed as now the V0. So, the stocks due to uncertainty of dividends infinity maturity date and unknown sale price at the horizon date as we have seen in our earlier example that we don't have a certain value of dividend, we don't have a specific duration of the security item and we don't have a certain value of closing stock price. So, these are the values that we estimate using certain parameters and we estimate them with reference to our horizon period that is our investment period. Now, one can continue substituting for price indefinitely if we have these values, we can substitute them. This means that to determine the intrinsic value, we need to determine the present values of individual years dividend till the time we have our horizon period. This means that stock price should equal the present value of all the expected future dividends into perpetuity. This means that if our security has no definite period then across the whole life of the security we will be deriving some amount of dividends each year. Now, to determine the present value of such security we need to determine these values using the perpetuity formula. Now, this perpetuity formula that we have recently seen is called as the dividend discount model or DDM of stock prices. We see that the dividend discount model ignores does not ignore capital gain. In fact, the price at the end of the year or P1 assumes including the gain in it. A stock sale price in future depends on dividend forecast at that particular time horizon. Dividend discount model determines stock prices through the dividends because we have only the cash flows in the form of dividends. So, this dividend discount model takes into account these cash flows under the name of dividends. Dividends are the ultimate cash flows as I have said. These cash flows are used for determining the security value.