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What are the methods of dividend discount model？

幫考網校2020-10-12 14:48:01

There are two main methods of dividend discount model:

1. Gordon Growth Model: This method assumes that dividends will grow at a constant rate indefinitely. The formula for this model is:

V0 = D1 / (r - g)

Where:
V0 = the current value of the stock
D1 = the expected dividend in the next period
r = the required rate of return
g = the expected growth rate of dividends

2. Two-Stage Dividend Discount Model: This method assumes that dividends will grow at a higher rate for a certain period of time and then stabilize at a lower rate. The formula for this model is:

V0 = (D1 / (1 + r)^1) + (D2 / (1 + r)^2) + ... + (Dn / (1 + r)^n) + (Pn / (1 + r)^n)

Where:
D1, D2, ..., Dn = the expected dividends in years 1 to n
Pn = the expected price of the stock at the end of year n
r = the required rate of return

The first part of the formula calculates the present value of the dividends in the growth phase, while the second part calculates the present value of the price at the end of the growth phase.