What is the model of discounted dividend?

A discounted dividend model or dividend discount model (DDM) is a financial method of shares analysis in which the future value of dividends issued by a basic company is transferred to a pure current value. If the net current value replaces the current price of shares, investors are considering undervalued shares and therefore for an attractive investment for growth income. The net present value that falls below the current price indicates an overvalued action that adapts to the price in the future. The basic formula of the model discounted dividend for society without growth is p = div/r, where P is the current estimate of value, the current dividend that the society pays and R is a discount rate or a rate of return. The formula for the discounted dividend model applies only to the shares of companies offering dividends, the Dividend formula.

For example, company X releases $ 0.75 in USD (USD) in dividends. The required return rate for other types of investmentje about six percent. Provided that the company does notThe growth company, the current value is calculated by distributing $ 0.75 by 0.06, which brings a value of $ 12.50 per share. If the current price of shares for X shares is $ 11.00, shares, and therefore underestimated, can prove to be a useful investment. On the other hand, if shares are currently sold for $ 13.00, it is overvalued.

For growth shares, the investor should adjust the formula for the dividend model by a discount change of the formula to R - G, where r is a discount rate and G, the estimated growth rate. The investor can estimate the future growth rate based on the past results of the company, the growth rate of the company or other well -known variables, such as the impending launch of the new product. If an investor in Company X assumes a growth rate of two percent, the current UE is calculated by a deduction of 0.02 of 0.06 and a 0.75 distribution of the result. By using this modificationGrowth in the dividend discount model, also called the Gordon model, by the investor would see that the current value of the shares is 18.75, when considering the expected growth of the company. However, the Gordon model assumes a constant dividend over time and a constant level of business growth.

Detrustors of the model of discounted dividends point out that DDM relies on a large number of speculations. Dividends must not be repaired and companies can grow at different rates. Another problem with the formula is to determine the expected return or discount rate that may vary over time. The high growth rate that exceeds the expected interest rates also invalids the formula because no supply has a negative value. The dividend discount model strengthens the basic principle that the value of the company comes from its future cash flows, but its shortcomings PNAINT need for investors to use various financial tools to assess security investments.