UrbanPro

Learn Stock Market Investing from the Best Tutors

  • Affordable fees
  • 1-1 or Group class
  • Flexible Timings
  • Verified Tutors

Search in

What is the dividend discount model (DDM)?

Asked by Last Modified  

Follow 2
Answer

Please enter your answer

The dividend discount model (DDM) is a quantitative method used for predicting the price of a company's stock based on the theory that its present-day price is worth the sum of all of its future dividend payments when discounted back to their present value.
Comments

The Dividend Discount Model (DDM) is a valuation method used to estimate the intrinsic value of a stock by analyzing the present value of its expected future dividend payments. DDM is primarily applied to dividend-paying stocks, and it is based on the principle that the intrinsic value of a stock...
read more

The Dividend Discount Model (DDM) is a valuation method used to estimate the intrinsic value of a stock by analyzing the present value of its expected future dividend payments. DDM is primarily applied to dividend-paying stocks, and it is based on the principle that the intrinsic value of a stock is the sum of its expected future dividend payments, discounted to their present value. The DDM equation takes the following form:

Intrinsic Value (IV)=∑t=1nDt(1+r)tIntrinsic Value (IV)=t=1n(1+r)tDt

Where:

  • IVIV is the intrinsic value of the stock.
  • DtDt is the expected dividend payment in year tt.
  • rr is the discount rate, which represents the required rate of return or cost of equity for the investor.
  • nn is the number of years of forecasted dividend payments.

The DDM can take different forms, depending on how dividends are expected to behave over time. The two most common versions of the model are the Gordon Growth Model (also known as the Dividend Growth Model) and the Two-Stage DDM.

  1. Gordon Growth Model:

    • This model assumes that dividends will grow at a constant rate indefinitely. It is based on the idea that the company will maintain a stable dividend growth rate. The formula is as follows:

      IV=D0×(1+g)r−gIV=rgD0×(1+g)

      • D0D0 is the most recent dividend.
      • gg is the constant growth rate of dividends.
      • rr is the discount rate.
  2. Two-Stage DDM:

    • This model accounts for a period of high growth in dividends (typically in the early years) followed by a lower, more stable growth rate in the later years. The formula is more complex and requires separate calculations for the high-growth and stable-growth periods.

The DDM is commonly used for valuing mature, dividend-paying companies, such as those in industries like utilities or consumer staples. It is important to note that the accuracy of DDM valuations depends on the reliability of dividend forecasts and the appropriateness of the discount rate. DDM may not be suitable for companies that do not pay dividends or for those with erratic dividend patterns.

Additionally, investors should exercise caution when using DDM, as it makes several assumptions that may not always hold true, such as constant dividend growth rates and stable discount rates. As with any valuation method, it is advisable to consider DDM in conjunction with other valuation approaches and to conduct sensitivity analyses to account for variations in key assumptions.

 
read less
Comments

Related Questions

Stock Market Investment What is the difference between Equity,Debt and Balanced Fund? Suprika
equity means companies like INFOSYS,TCS,RELIANCE,ITC.In equities if you invest it will go up and down in prices,WHERE as in debt you have fixed income like fixed deposits.In balanced fund both equities and debt will be balanced
Suprika
Is stock trading a skill or luck?
Stock market trading is a skill which is acquired after years of hard work. No one can become an expert in any field until they have spent atleast few years. Also the time taken for someone to become skilled...
Navneet
0 0
6
Is trading easy?
Trading is among the most toughest skills in the world. It takes a lot of years to master the skill of trading.
Subhradeep
0 0
5
How to be successful on stock market?
Yes ! sound interesting and reminding me of my early life, when I used to Google the same question always and tries to find out the biography of famous traders and their ways of trading, The way they make...
SUDIP
Where do i find stock related information?
for Technical information you go with investing.com / topstockresearch.com/ keystocks .com/screens .in & many more .
Praneeth
0 0
5

Now ask question in any of the 1000+ Categories, and get Answers from Tutors and Trainers on UrbanPro.com

Ask a Question

Related Lessons

Do you know ? Investment Vs Trading - Stock Market Advanced Technicals
Do you know? Investment Vs Trading - Stock Market Advanced Technicals.As per technical rules and trading ethics, Trading will highly risk basis earing. Sometime we will get profits, and Sometime we will...

Intraday Trading - My way of doing it
Who I am Right now is " I am a Greedy person, compulsive trader, proving person, manipulator, Independent, non acceptor, not touch with reality, ready to book losses saying it is normal to book losses-...

Top 10 tools in Technical Analysis to earn from Stock Market
There are 250 tools and techniques in the stock market which are available worldwide. But a trader is confused which tools should be used. So we would share the secret of the money making through technical...

What is Auction in Stock Market or What happen if you don't have share and you sell it?
Auction : Auctions are initiated by the Exchange on behalf of trading members for settlement related reasons. The main reasons are Shortages, Bad Deliveries and Objections. There are three types of participants...

Where should I make my early big investments as a stock trader /investor ?
Where should I make my significant early investments as a beginner level (< 2 Years) stock trader /investor? Is a question many of my students ask me as they get connect to me. The most significant...

Looking for Stock Market Investing classes?

Learn from the Best Tutors on UrbanPro

Are you a Tutor or Training Institute?

Join UrbanPro Today to find students near you
X

Looking for Stock Market Investing Classes?

The best tutors for Stock Market Investing Classes are on UrbanPro

  • Select the best Tutor
  • Book & Attend a Free Demo
  • Pay and start Learning

Learn Stock Market Investing with the Best Tutors

The best Tutors for Stock Market Investing Classes are on UrbanPro

This website uses cookies

We use cookies to improve user experience. Choose what cookies you allow us to use. You can read more about our Cookie Policy in our Privacy Policy

Accept All
Decline All

UrbanPro.com is India's largest network of most trusted tutors and institutes. Over 55 lakh students rely on UrbanPro.com, to fulfill their learning requirements across 1,000+ categories. Using UrbanPro.com, parents, and students can compare multiple Tutors and Institutes and choose the one that best suits their requirements. More than 7.5 lakh verified Tutors and Institutes are helping millions of students every day and growing their tutoring business on UrbanPro.com. Whether you are looking for a tutor to learn mathematics, a German language trainer to brush up your German language skills or an institute to upgrade your IT skills, we have got the best selection of Tutors and Training Institutes for you. Read more