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The Dividend Discount Model (DDM)

# The Dividend Discount Model (DDM) - The Dividend Discount...

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11-1 The Dividend Discount Model (DDM) The value of a share of common stock is the present value of all future dividends where: V j = value of common stock j D t = dividend during time period t k = required rate of return on stock j = + = + + + + + + + + = n t t t j k D k D k D k D k D V 1 3 3 2 2 1 ) 1 ( ) 1 ( ... ) 1 ( ) 1 ( ) 1 (

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11-2 The Dividend Discount Model (DDM) The N-Period Model If the stock is held for only N period, e.g. 2 years, and a sale at the end of year 2 would imply: The expected selling price, SPj2, of stock j at the end of Year 2 is crucial, which is in fact the 2 2 2 2 1 ) 1 ( ) 1 ( ) 1 ( k SP k D k D V j j + + + + + =
11-3 The Dividend Discount Model (DDM) Infinite Period Model (Constant Growth Model) Assumes a constant growth rate for estimating all of future dividends where: V j = value of stock j D 0 = dividend payment in the current period g = the constant growth rate of dividends k = required rate of return on stock j n n j k g D k g D k g D V ) 1 ( ) 1 ( ... ) 1

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