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Calculate the fair value of a stock balancing the dividend payout factors and the market expected returns. The DDM Calculator excludes prevailing market conditions.
|Dividend Payout Ratio, %|
|Return on Equity, %|
|Dividends per Share, $|
|Risk-Free Rate, %|
|Market Risk Premium, %|
|Dividend Discount Model Fair Value:|
Dividend discount model (DDM) is based on a theory that the current value of a company's stock is the sum of all its future dividend payments when discounted back to their present value. This method is used to predict the present value of a company's stock.
This model is also known as Gordon Growth Model (GGM). It is named after Myron J. Gordon of the University of Toronto. He first published it with Eli Shapiro in 1956.
As per the model, the stock may be considered for buying if the current value obtained by DDM is higher than the current price of shares. This is because it will show that the stock is undervalued and has a potential to give good returns on investment.
The DDM is one of the oldest methods of valuing the stocks. DDM is calculated using the following formula:
DDM excludes the prevailing market conditions, which makes it quite popular. It also helps in making direct comparisons among companies, even if they belong to different working sectors.
It majorly depends on what investors actually believe to be the present value of a stock. If they believe that it is the sum of discounted values of future dividends paid to them, they may use it for identifying overbought or oversold stocks.
DDM is a widely used method for valuing stocks. However, there are a few shortcomings that one may face while using this model:
The results provided by DDM are very sensitive to inputs. This means if there is a certain percentage decrease in the dividend growth rate, it is possible that the results obtained using DDM might show a lot more percentage decrease in the stock price when compared to the value of decrease in the dividend growth rate.
This model assumes the constant dividend growth in perpetuity. This may be safe to assume in case of mature companies that have an established history pertaining to dividend payments. However, in the case of new companies the dividend growth may be fluctuating or perhaps have no dividends at all.
There are some companies that keep paying dividends even if they are making losses. The DDM also falls behind to give the correct results for these companies because the rate of return is lower than the dividend growth rate.
The DDM calculator simplifies calculating different variables used to calculate the fair value of a company's stock.
Once you enter all the above information into the calculator, you will have the DDM fair value of the stock in question. When used carefully with correct inputs, the DDM is a simple yet effective method of calculating stock value.
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