Comments on: Evaluating Stocks using Dividend Discount Model

By: student

student — Sat, 27 Aug 2011 12:56:00 +0000

What if g ir greater than r? Does that mean that in event like this, dividend discount model cannot be used? Pls assist. thank you.

By: NoviceInv

NoviceInv — Tue, 04 Jan 2011 19:23:00 +0000

P=D/r-g : it is obvious if g increases then r(required rate) gets smaller and since the divisor(r-g) decreases, then Div increases and P is larger, may be overvalued in some instances.

I hope that helps from high schooll Algebra.

By: Pika_n2

Pika_n2 — Thu, 16 Sep 2010 17:16:00 +0000

What if the dividend growth rate is negative? As the dividend payout decrease from 10 cents to 5 cents per year? Please advice.

By: Dividend Discount Model and WACC - Topic Research, Trends and Surveys

Dividend Discount Model and WACC - Topic Research, Trends and Surveys — Sun, 18 Jul 2010 03:48:15 +0000

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By: njeru

njeru — Mon, 13 Jul 2009 16:13:22 +0000

Just like Joshua had asked,in a case where you don't know the share price (unquoted) how do you get the r?for g you can assume growth in related industries

By: Savings Interest Calculator

Savings Interest Calculator — Fri, 12 Jun 2009 19:58:26 +0000

I think there are now a lot of undervalued dividend paying stocks due the global economic fallout. It looks like we're in for a sideways market for some time. As such, I wouldn't be investing in anything that doesn't pay some sort of dividend. Thanks for sharing this formula; it should definitely help find the dividend stocks with the greatest potential.

By: Rohit

Rohit — Thu, 11 Jun 2009 11:32:00 +0000

The CAPM is necessary to estimate the cost of equity i.e. r which will feed into the dividend valuation model. Usually r will be a function of the risk appetite of investors and will generally exceed the cost of debt.

This is a very subjective area and expectations of different investors will vary – e.g. institutional investors, ordinary shareholders and speculators

Lots of hedge funds use the alpha values – i.e. return in excess of CAPM – also known as the abnormal rate of return which can be useful

By: Rohit

Rohit — Thu, 11 Jun 2009 11:01:02 +0000

r is the cost of equity & hence should not be confused with the WACC which is the firms weighted average cost of capital (i.e. including cost of debt). Unless a firm is 100% equity financed, the WACC will not be the same as cost of equity!

the formula for r is (dividend/share price) +growth rate %

The cost of equity will always be higher than debt as debt will carry a tax shield. CAPM will be useful too but again the model suffers from the same limitations as the DVM due to the assumptions such as market rate, risk free rate and beta values. Also not useful for layman as can be complex

By: Olga

Olga — Sun, 08 Feb 2009 13:24:40 +0000

Zahid, I suppose Joshua and the rest should also mind taking a glimpse at the CAPM and WACC models. And the arbitrage pricing model too. Just so that their hearts dont desire the r over 100%

By: Olga

Olga — Sun, 08 Feb 2009 13:24:00 +0000

Zahid, I suppose Joshua and the rest should also mind taking a glimpse at the CAPM and WACC models. And the arbitrage pricing model too. Just so that their hearts dont desire the r over 100%