Question

Research and find at least two opposing views on stock dividend valuation models and present your own opinions on which you might prefer and why. CITE SOURCES and please do not copy previous answered questions that are similar.

Answer 1

MM Model

Modigliani – Miller hypothesis goes above and beyond and represents the commonsense circumstances where dividends are not pertinent to investors. Regardless of whether an organization delivers a dividend or not, the investors are sufficiently competent to make their own incomes from the stocks relying upon their Modigliani-Miller Theory. Instead, the investors earn from the capital gains that a Company earns by investing the retained earnings for growth opportunities. MM Model is also known as the Dividend Irrelevance theory and takes a stance that dividends play no role absolutely in drivinf investor sentiments, stock valuation and overall corporate performance. (Source: efinancemanagement.com)

Dividend Discount Model

Dividend discount model takes an opposing view as compared to the MM Model. It assumes that the stock valuation directly depends on the future dividends declared by the Company. According to this model, the intrinsic value of a share is equal to the present value of future dividends (cash inflows) discounted at the required rate of return expected by shareholders.

In my view, Dividend discount model is a better theory for stock valuation as it builds upon the basic idea of valuing any asset, i.e, the value equals to the present value of future benefits, discounted at the minimum rate of return expected by the asset holder.