Dividend Discount Model (Formula, Example) | Calculate Stock Value using DDM

In this video on Dividend Discount Model, we discuss what is Dividend discount model, formula and examples. Here we also look at stock value calculation using DDM Method.

Dividend Discount Model assumes that we can calculate the fair value of a stock by finding the present value of its dividends.

Here we are assuming that the company is a dividend paying mature company and gives yearly dividends. We cannot apply this concept to companies like Apple or Google that have never paid dividends.

Dividend Discount Model Formula (zero growth model) = Stock’s Intrinsic Value = Annual Dividends / Required Rate of Return

Dividend Discount Model Formula (Constant Growth) = Dividend(0) x (1+g) / (Ke - g)

Here, g is the constant growth rate in dividends
Ke is the cost of equity
Dividend(0) is the last year's dividend

Dividend Discount Model Example -
We can apply dividend discount model on companies like Walmart. Walmart Dividends have increased in the past 3 years and are in a mature phase.

Dividend Discount Model Calculation
This years dividend paid is $4. Growth in Dividend is 6% (infinite)
What is the instrinsic value of the stock if the required rate of return is 12%?
D1 = $4 x 1.06 = $4.24
Ke = 12%
Growth rate or g = 6%
Intrinsic stock price = $4.24 / (0.12 – 0.06) = $4/0.06 = $70.66

[agastyasinghenglishmoviere]

Very nice explanation, the same question was on udemy with wrong figures, you saved my day, nice job!

[purudate]

Please move to 5:06. Why have you taken $20 in year 2 while you assumed that dividend will be $21.6 in Year 2?

[himanshuverma]

Sir, please try to speak a little slowly, then it would become much better to understand. although it was really informative, Thank you.

[test-mmbv]

this would have been much more useful if most fields are prepared beforehand, like other educational vids.

[takshilkanekar]

literally reading what's on the website. what's the point of watching