Transcription of CHAPTER 13 DIVIDEND DISCOUNT MODELS
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CHAPTER 13 DIVIDEND DISCOUNT MODELS
1. CHAPTER 13. DIVIDEND DISCOUNT MODELS . In the strictest sense, the only cash flow you receive from a firm when you buy publicly traded stock is the DIVIDEND . The simplest model for valuing equity is the DIVIDEND DISCOUNT model -- the value of a stock is the present value of expected dividends on it. While many analysts have turned away from the DIVIDEND DISCOUNT model and viewed it as outmoded, much of the intuition that drives discounted cash flow valuation is embedded in the model. In fact, there are specific companies where the DIVIDEND DISCOUNT model remains a useful took for estimating value . This CHAPTER explores the general model as well as specific versions of it tailored for different assumptions about future growth. It also examines issues in using the DIVIDEND DISCOUNT model and the results of studies that have looked at its efficacy.
Value per share of stock = ∑ t=∞ t=1 t e t (1+ k ) E(DPS ) where, DPS t = Expected dividends per share ke = Cost of equity The rationale for the model lies in the present value rule - the value of any asset is the present value of expected future cash flows discounted at a …
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