Dividend discount model
Valuing a share as the present value of the dividends it will pay. In its constant-growth form the answer hangs on the gap between the required return and the growth rate.
Where you will meet it
Dividend discount model appears in 4 learning outcomes on the CFA syllabus. A few of them:
- Work out a share's intrinsic value with the dividend discount model
“The dividend discount model values a share as the present value of the dividends it will pay.”
- Explain what assuming a going concern means and set a going concern value against a liquidation value
“The trap is applying a going concern model such as a dividend discount model to a distressed company whose survival is genuinely in doubt, where liquidation value sets the floor.”
- Contrast what FCFF, FCFE, dividend and residual income models each need as inputs
“The dividend discount model uses forecast dividends at the cost of equity, which suits steady payers.”
- Back out a required return from any DDM, including the H-model and the Gordon growth model
“Any dividend discount model can be solved for the discount rate that makes model value equal the market price; that rate is the expected return implied by the price.”
See also
Present value · Required return
Practise it
Practise dividend discount model until it is automatic: questions that explain every wrong option.
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