What is a Dividend Discount Model?
Dividend discount models are valuation models that are utilized to identify stocks that are currently undervalued. This mathematical approach makes it possible to identify the price per unit that the stock should be selling at. The dividend discount model takes into consideration the projection of dividend payments that will take place in the future and how they relate to the current discounted value of the stock issue. The basic formula for a dividend discount model requires that the current market value of the corporation’s equity be a known factor. Ideally, the current market value will be the same as the present value of anticipated dividend payments that are set for issue over the next several periods. However, this formula makes a couple of assumptions that may or may not come to pass. A dividend discount model is a valuation model that relies on one of two assumptions. In one common scenario, the assumption is that the dividend payments are fixed and are not likely to change in
