Difference between revisions of "Dividend discount model"

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The '''dividend discount model''' is 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).
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The '''dividend discount model''' is 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.
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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|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:
 
Over the long term, the stock price can be modeled as:

Revision as of 18:16, 17 February 2014

The dividend discount model is 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