gen-define-the-dividend-discount-model-and-give-one-short-worked-d4e8

Define the dividend discount model and give one short worked example.

# Dividend Discount Model (DDM) ## Definition The Dividend Discount Model is a valuation method that calculates a stock's intrinsic value based on the present value of all its expected future dividend payments. The model assumes that a stock's true value equals the sum of all future dividends discounted back to present value. ## Basic Formula (Gordon Growth Model) The most common form is the constant growth DDM: **P₀ = D₁ / (r - g)** Where: - P₀ = Current stock price (intrinsic value) - D₁ = Expected dividend next year - r = Required rate of return (discount rate) - g = Constant dividend growth rate ## Worked Example **Problem:** A company just paid a dividend of $2.00 per share. Dividends are expected to grow at 5% annually forever. Your required rate of return is 10%. What is the stock's intrinsic value? **Solution:** - Last dividend (D₀) = $2.00 - D₁ = D₀ × (1 + g) = $2.00 × 1.05 = **$2.10** - r = 10% or 0.10 - g = 5% or 0.05 P₀ = $2.10 / (0.10 - 0.05) P₀ = $2.10 / 0.05 **P₀ = $42.00** **Answer:** The stock's intrinsic value is $42.00 per share.