Dividend Discount

Last modified 17:46, 1 Oct 2012

Dividend Discount

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Financial theory says that the value of a stock is the present value of future cash flows.

Stocks are bought for the cash flow expected from them. The dividend discount model says that the cash flows to the shareholders are dividends and hence values a stock by the present value of future dividends.

The model is taught in any corporate finance course and although is quite conservative is used by big brokerage firms. Merrill Lynch uses the dividend discount model as a component of its market-beating Alpha Surprise Model. JP Morgan uses the dividend discount model as part of its stock selection process.

Keep in mind that the dividend discount model does not take into account intangible assets.

User Defined Parameters

Parameters that can be changed by users to change the selected formula's result include the following:

Required Rate of Return

This percentage amount represents the amount of average annual return required to be generated by the company in the period selected in the Years to Forecast setting.

Current ROE

This amount is populated using fundamental data from ValueGain's fundamental data provider.

However, different analysts use different methodologies for calculating this ratio.

Users can substitute their preferred analyst's ratio and recalculate the results.

Payout Ratio

This percentage amount is populated using fundamental data from ValueGain's fundamental data provider.

However, since different analysts use different methodologies for calculating this ratio, users can substitute their preferred analyst's ratio and recalculate the results.

Results

Fair Value

The Fair Value calculation results are displayed after the calculator name in the Calculator Selection List.

Users cannot directly alter the resulting Fair Value, however changing the highlighted parameters (yellow background and blue outline) will normally result in a change in results for that calculator and any other calculators that use those parameters.

Results in Table and Graphs

Some of the results for the individual stock can be displayed in tables and graphs in the Results Display area on the right side of the work page.

For a detailed description of these tables and graphs, go to the Results Display topic.

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