Discounted Dividend Valuation Model

The present value of stock can also be found using the Discounted Dividend Model. The Dividend Discount Model uses the present value of the stock, the
expected future dividends, and the growth rate. This model is similar to the Constant Growth Model accept it discounts the dividends at the expected
return instead of discounting the free cash flows at the weighted average cost of capital.

VS = Stock Value
D0 = Dividnend at time 0 (most recent)
g = Growth rate
Rs = Stockholders Required Rate of Return

Example: As stated previously, JonesCo has a constant growth rate of 5% and the stockholder required rate of return is 10%. The last dividend paid was
Rs 1.023. Using this model what is the value of their stock?

21.483
The share of a certain stock paid a dividend of Rs.3.00 last year. The dividend is expected to grow at a constant rate of 8 percent in the future. Th
required rate of return on this stock is considered to be 15 percent. How much should this stock sell for now? Assuming that the expected growth
rate and required rate of return remain the same, at what price should the stock sell 3 years hence?

Value of stock 46.2857

After 3 years 58.3067

of 8 percent in the future. The
ing that the expected growth
The share of a certain stock paid a dividend of Rs.10.00 last year. The dividend is expected to grow at a constant rate of 15 percent in the future.
this stock is considered to be 18 percent. How much should this stock sell for now? Assuming that the expected growth rate and required rate of
price should the stock sell 4 years hence?

Value of stock 383.33

After 4 years 670.452

e of 15 percent in the future. The required rate of return on
wth rate and required rate of return remain the same, at what
The equity stock of Hansa Limited is currently selling for Rs.280 per share. The dividend expected next is Rs.10.00. The investors' requ
return on this stock is 14 percent. Assume that the constant growth model applies to Max Limited. What is the expected growth rate o
Limited?

Vs 280 280.00002975427
divided 10
rate 0.14
growth 10.43%
13.48276
29.2

0.10069
Rs.10.00. The investors' required rate of
is the expected growth rate of Max
The equity stock of Amulya Corporaion is currently selling for Rs.1200 per share. The dividend expected next is Rs.25.00. The investors'
required rate of return on this stock is 12 percent. Assume that the constant growth model applies to Max Limited. What is the expected
growth rate of Max Limited?
Sloppy Limited is facing gloomy prospects. The earnings and dividends are expected to decline at the rate of 5 percent. The previous dividend wa
the current market price is Rs.10.00, what rate of return do investors expect from the stock of Sloppy Limited?

Dividend 2
value of stock 10
growth rate -5%

1.9 0.5 1.4 14.00%

cent. The previous dividend was Rs.2.00. If
Mammoth Corporation is facing gloomy prospects. The earnings and dividends are expected to decline at the rate of 10 percent. The
dividend was Rs.3.00. If the current market price is Rs.25.00, what rate of return do investors expect from the stock of Mammoth Lim
he rate of 10 percent. The previous
he stock of Mammoth Limited?