101 Concepts for the Level I Exam
Essential Concept 48: Dividend Discount Model (DDM)
The value of a stock using DDM for a single-holding period is:
The value of a stock using DDM for multiple finite holding periods is:
The value of a stock for infinite holding periods is:
There are two approaches to forecast dividends.
- One is to assume that they follow a stylized growth pattern (constant growth, two-stages of growth, or three stages of growth).
- The other alternative is to forecast dividends for a finite period, then forecast the remaining dividends based on a pattern or by calculating the terminal stock price.