Chapter 6 Set 1 Dividend Discount Models
Chapter 6 Set 1 Dividend Discount Models
D 0 1 g D1
P0 (Important : g k)
kg kg
The Dividend Discount Model:
Estimating the Growth Rate
You believe that this rate will last for only three more
years.
Then, you think the rate will drop to 10% per year.
Using the long run growth rate, g, the value of one share
of stock at Time 3 can be calculated as:
P3 = [D3 x (1 + g)] / (k g)
$87.58
Discount Rates for
Dividend Discount Models
Simple to compute
Not usable for firms that do not pay dividends
Not usable when g > k
Is sensitive to the choice of g and k
k and g may be difficult to estimate accurately.
Constant perpetual growth is often an unrealistic
assumption.
Observations on Dividend
Discount Models, II.