Description
The Dividend Discount Model (DDM) is a financial valuation approach used to estimate the intrinsic value of a stock by discounting its expected future dividends back to their present value. It assumes that the fair value of a stock is determined by the sum of all its future dividends, discounted at a required rate of return or discount rate. The basic formula for the DDM is expressed as the present value of all future dividends, which is calculated as the dividend per share divided by the discount rate minus the expected dividend growth rate. This model is based on the premise that the value of a stock is inherently tied to the dividends it pays out to shareholders, making it particularly relevant for companies with stable dividend policies. However, the DDM has limitations, particularly in cases where dividend payments are erratic or when companies reinvest earnings instead of distributing them as dividends.