Difference between revisions of "Dividend discount model"

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(Mentioned in CAPM page, so added definition (please review).)
 
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==External links==
==Links==
 
 
*[http://www.google.com/search?q=definition%3A+dividend+discount+model&btnG=Search Definitions of dividend discount model on Google]
 
*[http://www.google.com/search?q=definition%3A+dividend+discount+model&btnG=Search Definitions of dividend discount model on Google]
 
*[http://www.investopedia.com/articles/fundamental/04/041404.asp Digging Into The Dividend Discount Model] (from Investopedia)
 
*[http://www.investopedia.com/articles/fundamental/04/041404.asp Digging Into The Dividend Discount Model] (from Investopedia)
 
*[http://en.wikipedia.org/wiki/Dividend_Discount_Model Dividend Discount Model on Wikipedia]
 
*[http://en.wikipedia.org/wiki/Dividend_Discount_Model Dividend Discount Model on Wikipedia]
 
  
 
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[[Category:Glossary]]
 
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[[Category:Financial Theory]]
 
[[Category:Financial Theory]]
 
[[Category: US Stocks]]
 
[[Category: US Stocks]]
 
[[Category: International Stocks]]
 
[[Category: International Stocks]]

Revision as of 22:51, 20 August 2013

Dividend Discount Model

A way of valuing a company based on the theory that a stock is worth the discounted sum of all of its future dividend payments. Dividend discount models are used to determine if a stock is a good buy (selling at a lower current price than indicated by the model) or a bad buy (selling at a higher current price than indicated by the model).

The value of a stock is worth all of the future cash flows expected to be generated by the firm, discounted by an appropriate risk-adjusted rate. According to the model, dividends are the cash flows that are returned to the shareholder.

Over the long term, the stock price can be modeled as:

Current Stock Price = Div / (r - g)
  • where Div is the current dividend / year
  • r is the rate of return
  • g is the expected growth rate

External links