Enter the expected dividends per share, the cost of capital equity, and the dividend growth rate to determine the value of the stock using DDM.
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DDM Formula
The following formula is used to calculate the value of a stock using DDM.
DDM = EDPS / (CCE – DGR)
- Where DDM is the stock value ($)
- EDPS is the expected dividend per share ($)
- CCE is the cost of capital equity (%)
- DGR is the dividend growth rate (%)
DDM Definition
What is DDM?
DDM, short for dividend discount model, is a model used in financing and investing to present the value of a stock based on the future payout of all dividends when discounted back to their present value.
Example Problem
How to calculate the stock value using DDM?
- First, determine the expected dividend per share for the current period.
For this example, the dividend per share is expected to be $4.50.
- Next, determine the cost of capital.
In this case, the cost of capital is found to be 8%.
- Next, determine the expected dividend growth rate.
This dividend is expected to grow at 5% per year.
- Finally, calculate the value of the stock using the discount dividend model.
Using the formula above, the stock value is found to be:
DDM = EDPS / (CCE – DGR)
DDM = 4.50 / (.08 – .05)
DDM = $150.00
