What is a dividend discount model?

Dividend discount models are valuation models that are used to identify shares that are currently undervalued. This mathematical approach allows you to identify the price for a unit for which shares should be sold. The dividend discount model takes into account the projection of the dividend payments that will take place in the future and how they relate to the current discounted value of shares.

The basic formula for a dividend discount model requires that the current market value of its own capital be a known factor. Ideally, the current market value will be the same as the current value of the expected dividend payments, which are set for extradition in the next few periods. However, this formula creates several assumptions that may or may not happen. In one common scenario, it is assumed that dividend payments are firm and are unlikely to change in the near future. The second scenario requires recognition that dividend payments can grow as small butConstant rate. With this second approach, the company's own capital is considered eternity. Understanding which scenario applies to the shares considered is very important because it will affect how dividend payment concerns the capital of society.

There are variations of these two basic approaches to the Dividend Discount. These variations are often ways to take into account the factors that are unique to the society and how these factors affect society's justice. Because the model can be calculated using various data above and for basic models, not all financial analysts consider this approach particularly useful.

Not every company can use the Dividend Discount model. One obvious exception to society that does not issue dividends. However, even companies that publish dividends may find that the formula has at best limited valueD is an evaluation of the overall equity of the company and, as is the case of the structure established for the issue of dividends to shareholders.