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

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

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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.

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jeff jeffy answered 2 months ago
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