Question

In most valuation of stock prices, we use the DDM model, use the DDM to value a stock of your choice (Walmart ), show the work on your answer and explain what this shows of your chosen stock remenber to have a good logical arguments.

Stock value = Dividend per Share / (discount rate - dividend growth rate)

Answer 1

Dividend Discount Model: - This model is used when company is consistently paying dividend to the Shareholders. We value the Stock on the basis of dividend paid by the company.

For E.g.

Stock Value:- Dividend Per share/(Discount rate-Growth rate)

Which means that Expected Dividend to be paid is capitalized (Discount Rate-Growth rate) on a assumption that growth rate is constant and less than required Rate of Return.

Case 1: suppose Company paid dividend of $2 per share last year and required rate of return is 10% with the growth rate of 2%

So value= 2(1.02)/ (0.1-0.02)

              = $25.5

So, $25.5 means that if the company is consistently paying the dividend of $2 per share then value of the company’s stock is $25.5

Case 2: Suppose the company is expected to pay dividend of $2 per share which is expected to paid perpetually (throughout the life) with the required rate of return is 10%

So Value= 2/0.01

              =    $20

So if company is expected to pay dividend at $2 only per year, its value is $20.

So, dividend model is based on the theory that it is the present value for all future payments to be made by the company to the shareholders(Dividend)