Question

In: Finance

Enumerate the steps of using dividend discount model to value stock?

Enumerate the steps of using dividend discount model to value stock?

Solutions

Expert Solution

The dividend discount model can be used to value a stock that pays a dividend which is consistent with its earnings.

The value of a stock is equal to the present value of all the future dividends.

The constant dividend discount model is a simple model in which the value of a stock is calculated using a perpetual formula.

Div1 = Dividend in year 1 and r is the cost of equity.

In a constant growth model, the value of the stock is found using the below formula:

where g is the constant growth rate of dividends.

A combination of the two is the most common model, in which the dividend grows at a certain rate for the first few years and then it is assumed that the dividends remain constant forever.

Note that the dividend discount model cannot be (or should not be) used to value stocks that pay dividends, which have no relationship with earnings.

Can you please upvote? Thank You :-)

jeff jeffy answered 1 month ago
Next > < Previous

Related Solutions

Assume that you are using the dividend discount model (the Gordon Growth Model) to value stock....
Assume that you are using the dividend discount model (the Gordon Growth Model) to value stock. The stock currently pays no dividends, but expected to begin paying dividends in five years. The firm's cost of equity is 11%. Compute the value of a stock paying no dividends today, but that is expected to pay annual dividends of $4 in five years and the stock is expected to grow at a rate of 9% for the next six years that it...
Using a dividend discount model, what is the price for this stock? Stock covariance with the...
Using a dividend discount model, what is the price for this stock? Stock covariance with the market= 0.5 Market variance = 0.25 Stock covariance with a second risk factor= 0.6 Variance of the second factor= 0.3 Market Premium:3% Second factor risk premium=1% Risk free rate =2 % Current earnings per share= $5, The ROE is expected to shrink (decrease) at the rate 10% for first 5 years The ROE is expected to grow at the rate 8% forever after the...
Find the intrinsic value of a share of stock XYZ using the two-stage dividend discount model....
Find the intrinsic value of a share of stock XYZ using the two-stage dividend discount model. The data for the valuation model has been obtained from the Value Line Research Center. Because the report contains data from the end of 2014, we will use the end of 2014 (after the 2014 dividend has been paid) as t = 0. (Need guide starting from part d, thank you so much) a) (5 pts) The XYZ's beta from Value Line is 1.35....
How are the Dividend Discount Model and the Value Bonds Model Similar?
How are the Dividend Discount Model and the Value Bonds Model Similar?
What are the limitations of the dividend discount model? A stock currently pays a dividend of...
What are the limitations of the dividend discount model? A stock currently pays a dividend of $4 for the year. Expected dividend growth is 20% for the next three years and then growth is expected to revert to 4% thereafter for an indefinite amount of time. The appropriate required rate of return is 10%. What is this stock’s intrinsic value? What is the rate of return on an investment that costs $500 and is sold after 1 year for $560?
What are the limitations of the dividend discount model? A stock currently pays a dividend of...
What are the limitations of the dividend discount model? A stock currently pays a dividend of $4 for the year. Expected dividend growth is 20% for the next three years and then growth is expected to revert to 4% thereafter for an indefinite amount of time. The appropriate required rate of return is 10%. What is this stock’s intrinsic value? What is the rate of return on an investment that costs $500 and is sold after 1 year for $560?
a) Using the Dividend Discount Model (DDM), you estimate the intrinsic value of ABC Ltd is...
a) Using the Dividend Discount Model (DDM), you estimate the intrinsic value of ABC Ltd is $7.50. If the constant dividend growth rate is 5% and the required rate of return is 9% per annum. Calculate the dividend per share paid by ABC Ltd today. b) ABC Ltd just announced that it is not expected to pay any dividends for the next 4 years. Then the expected dividend per share found in part (a) will be paid to shareholders, which...
The three steps involved in the non-constant growth dividend discount model are:
The three steps involved in the non-constant growth dividend discount model are:        A. Step 1: Set the investment horizon (year H) as the future year after which you expect the company's growth to settle down to a stable rate.        B. Step 2: Forecast the stock price at the horizon, and discount it also to give its present value today.        C. Step 1: Price estimated using the constant- growth formula to value the dividends that will be paid after the horizon...
Explain the advantages of using a two-stage dividend discount model (DDM) to value a share rather...
Explain the advantages of using a two-stage dividend discount model (DDM) to value a share rather than a constant-growth dividend model. Using a simple numerical example, describe one weakness in all DDMs
QUESTION START a) Using the Dividend Discount Model (DDM), you estimate the intrinsic value of ABC...
QUESTION START a) Using the Dividend Discount Model (DDM), you estimate the intrinsic value of ABC Ltd is $7.50. If the constant dividend growth rate is 5% and the required rate of return is 9% per annum. Calculate the dividend per share paid by ABC Ltd today. b) ABC Ltd just announced that it is not expected to pay any dividends for the next 4 years. Then the expected dividend per share found in part (a) will be paid to...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT