What is the Model Called That Determines the Present Value of a Stock Based on Its Next Annual Dividend, the Dividend Growth Rate, and the Applicable Discount Rate?
The model is called the Discounted Dividend Model (DDM), which calculates a stock's present value using its next dividend, dividend growth rate, and applicable discount rate.
by Sai V
Published Oct 20, 2023 | Updated Oct 20, 2023 | ๐ 1 min read
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What is the Model Called That Determines the Present Value of a Stock Based on Its Next Annual Dividend, the Dividend Growth Rate, and the Applicable Discount Rate?
A. Zero Growth
B. Dividend Growth
C. Capital Pricing
D. Earnings Capitalization
E. Discounted Dividend
The correct answer to the question is E. Discounted Dividend.
The model that calculates the present value of a stock based on its next annual dividend, the expected dividend growth rate, and the applicable discount rate is the Gordon Growth Model** or the Dividend Discount Model (DDM). This model is used by investors to estimate the intrinsic value of a stock by considering the future dividends it is expected to pay, adjusted for their growth rate and discounted back to present value using the required rate of return. So, option E. Discounted Dividend is the correct answer.
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