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.

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?

  1. First, determine the expected dividend per share for the current period.

    For this example, the dividend per share is expected to be $4.50.

  2. Next, determine the cost of capital.

    In this case, the cost of capital is found to be 8%.

  3. Next, determine the expected dividend growth rate.

    This dividend is expected to grow at 5% per year.

  4. 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