Dividend Discount Model Calculator

You can use this Dividend Discount Model (DDM) Calculator to quickly and easily estimate the true value of a stock using the dividend discount approach. The DDM is a stock valuation technique that determines the present value of a stock in relation to the dividends it is expected to yield. The DDM discounts the anticipated dividends to the present value as a means of calculating the extent to which a stock is undervalued or overvalued.

According to the DDM model, the current value of a share is equal to the summation of the net present value (NPV) of all future dividend payments. It can take a variety of forms, which vary according to the assumptions that are applied in relation to anticipated dividend growth.

However, in its most basic form, the Gordon Growth Model, the value of a stock is based on the application of the assumption that dividend growth will be stable. The following formula can be employed to determine the fair value of shares according to the Gordon Growth model:

Fair Value = Expected Dividends Next Year / (Cost of Equity – Expected Growth Rate)

Let's look at an example.

Let's say we have a stock that will pay an anticipated dividend per share of $5 in the next period at the cost of equity of 12% and an ongoing future growth rate of 3% in perpetuity. This stock would be valued as follows:

Value = $5 / (.12 − .03) = $55.56

As such, according to the DDM, the fair value of the share is $55.56. If the shares were to trade at any point above $55.56, they would be overvalued. If they were to trade below $55.56, they would be undervalued.

Formulas

The formulas we use in our DDM Calculator are listed below:

Expected Growth Rate = ( 1 – Dividend Payout Ratio ) × Return on Equity

Expected Dividends Next Year = Dividends per Share × (1 + Expected Growth Rate)

Cost of Equity = Risk-Free Rate + Beta × Market Risk Premium

Fair Value = Expected Dividends Next Year / (Cost of Equity – Expected Growth Rate)

You might also want to use our Capital Asset Pricing Model (CAPM) Calculator