Stock valuation method: dividend discount model

Introduction :

The dividend discount model known as the valuation method is the first to be told during the stock valuation phase. In this method, the profit company which has to be distributed among the shareholders after the withdrawal of dividend i.e. the reserve and provision are called a dividend. So dividend has been given more importance in this method because it is easier to analyze the company with a dividend. This formula is useful for the company which is paying a dividend every year. From this formula, it is estimated that the dividend and capital approval will be given as per the dividend given by the company over the past few years. Accordingly, the valuation of the company is done while thinking of the future result. And at this price, the valuation method is analyzed by estimating the dividend and share price to be given, and at what price should that stock is bought today.


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Dividend Discount Model:

Some guesses:

(1) The dividend discount model can be analyzed only annually. In this stock valuation method, the dividend is given annually.

(2) The first dividend is received after one year of buying equity shares.

Some aspects of analysis:


(1) the single term evaluation model

(2) Multi-period evaluation model

(3) zero growth model

(4) Sustainable Development Model

(5) two-step growth model


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Now we are going to compress the valuation in all the above-mentioned ways, so now we start.

(1) Single term valuation model:

In this valuation model, we believe that investors have to invest this money for only one year, according to which the formula and valuation have been done.


Po = D1 / (1 + r) + P1 / (1 + r)

PO = PO is the current market price of a share

D1 = Dividend expected a year hence

P1 = Price of share expected a year hence

r = rate of return required on the shares (equity)


ABC company equity share price expected to provide RS 2.00 and fetch a price of 18.00 a year hence. What price would it sell for now if investors, required rate of return is 12%? The current price will be:

PO = 2.0 / 1.12 + 18.00 / (1.12) = 17.86

(2) Multi-period evaluation model

PO = PO is the current market price of a share

D1 = Dividend expected a year hence

P1 = Price of share expected a year hence

r = rate of return required on the shares (equity)

In this model, we discuss that if companies equity shares have not any maturity period then the company will still run for an infinite time then this situation single period method is not useful then the multi-period valuation method works as the best formula. This model helps you to assume that the company runs infinitely and you can value shares at an infinite time.


Po = D1/ (1+r) + D2/ (1+r) ^2 + D3/ (1+r) ^3 + …… Dn/ (1+r) ^n

(3) zero growth model

In this method, we assume that if companies earning and dividend-paying capacity still remaining constant then what is the result of valuation as per dividend.

The zero-growth model clears this confusion and gives a way to get a result of this valuation method.

Formula :

Po = D/r

(It will continue till updates)