The Dividend Discount Model (DDM) Calculator is a financial tool used to estimate the intrinsic value of a stock based on its expected future dividends. It is widely used by investors to determine whether a stock is overvalued, undervalued, or fairly priced.
This calculator is particularly helpful for dividend-paying stocks, allowing investors to predict long-term returns by factoring in dividend growth rates and required rates of return.
Formula
To calculate the intrinsic value of a stock using the Dividend Discount Model, use the following formula:
DDM Formula:
P = D1 / (r - g)
Where:
- P = Intrinsic value of the stock
- D1 = Expected dividend in the next period (usually the next year)
- r = Required rate of return (discount rate)
- g = Growth rate of dividends
This model assumes that dividends will grow at a constant rate indefinitely, making it best suited for stable and mature companies with consistent dividend payments.
Dividend Discount Model Table
Below is a quick reference table that shows the intrinsic value of a stock based on different dividend growth rates and required returns.
| Expected Dividend (D1) | Required Return (r) | Growth Rate (g) | Intrinsic Value (P) |
|---|---|---|---|
| $2.00 | 8% | 3% | $40.00 |
| $3.00 | 10% | 4% | $50.00 |
| $1.50 | 7% | 2% | $30.00 |
| $2.50 | 9% | 3% | $50.00 |
| $4.00 | 12% | 5% | $57.14 |
This table helps investors quickly assess stock values without manual calculations.
Example Calculation
Let’s calculate the intrinsic value of a stock with the following details:
- Expected Dividend (D1): $3.00
- Required Rate of Return (r): 9% (0.09)
- Dividend Growth Rate (g): 4% (0.04)
Using the Formula:
P = 3.00 / (0.09 - 0.04)
P = 3.00 / 0.05 = $60.00
So, the intrinsic value of the stock is $60. If the stock’s market price is below $60, it may be undervalued and a good investment opportunity.
Most Common FAQs
The DDM assumes constant dividend growth, which may not always be realistic. Companies with irregular or no dividends may require alternative valuation models.
No, the DDM is only applicable for companies that consistently pay dividends and have a predictable growth rate.
A higher required return (r) decreases the intrinsic value of a stock, while a lower required return increases it. This is because investors demand higher returns for riskier investments.