Reading: Dividend Discount Model
What
is the Dividend Discount Model?
•The
dividend discount model (DDM) is a procedure for valuing the price of a stock
by using the predicted dividends and discounting them back to the present
value. If the value obtained from the DDM is higher than what the shares are
currently trading at, then the stock is undervalued.
DDM
Example
•Company
ABC just paid a $3.00 dividend and its dividend is expected to grow at a rate
of 5% indefinitely. ABC has a beta 1.2, return on the market is 12% and the
risk free rate is 4%. What would the intrinsic value of ABC stock be?
DDM
Example
•First
we would figure out the discount rate (required rate of return) by using the
CAPM.
CAPM
Required return = rf + beta (rm – rf)
.04 + 1.2(.12 - .04) = .136
Constant Growth Dividend Model
$3.00
(1.05) =
$36.63
.136 - .05
Остання зміна: вівторок 14 серпня 2018 08:50 AM