Discounted Dividend Valuation Model

V S = Stock Value D0 = Dividnend at time 0 (most recent) g = Growth rate r S = Stockholders Required Rate of Return The present value of stock can also be found using the Discounted Dividend Model. The Dividend Discount Model uses the present value of the stock, the expected future dividends, and the growth rate. This model is similar to the Constant Growth Model accept it discounts the dividends at the expected return instead of discounting the free cash flows at the weighted average cost of capital. Example: As stated previously, JonesCo has a constant growth rate of 5% and the stockholder required rate of return is 10%. The last dividend paid was $1.023. Using this model what is the value of their stock? The value of the stock is $21.483. Using the Constant Growth Model the value of the stock was $21.49, as you can see the value of the stock is approximately the same under both models. Discounted Dividend Valuation Model g r g D V S S −+ = ) 1 ( 0 483 . 21 % 5 % 10 %) 5 1 ( 023 . 1 $ = −+ = SS VV