DDM

[John Aaby]

What is the Dividend Discount Model? Can you briefly describe its advantages and limitations?

[AlexMercer]

Hi John, thanks for coming here.

The Dividend Discount Model (DDM) is one of the most popular stock valuation methods. It is designed based on future projections as it uses an input from the forecasted growth in future dividends. This way, the method measures the present value (what they would be worth if paid today) of those dividends. 

This method is very popular to compare companies that have a history of paying dividends to their shareholders, unlike for the startups and young businesses that have no projections of the future dividends. 

Formula for calculation of the DDM: 

Value of Stock=       (CCE−DGR)

                                       EDPS

where:

EDPS=expected dividend per share

CCE=cost of capital equity

DGR=dividend growth rate

 

Edited May 20, 2020 by AlexMercer

[Lily Green]

Hi John,

The Dividend Discount Model (DDM) refers to a quantitative method of determining the value of a stock price predicated on the presumption that the current share price equals the sum of all of the stock’s future dividends discounted back to their current value.

This method was founded on a belief that the intrinsic value of a stock reflects the current value of all future earnings produced by a security. Dividends represent positive capital produced by a company and given to the shareholders.