The Dividend Growth Model Calculator is a powerful tool used by investors to determine the intrinsic value of a stock based on its expected future dividends. It provides a quantitative method for assessing the attractiveness of an investment by considering both the expected dividends and the rate of return required by investors.
Formula of Dividend Growth Model Calculator
The Dividend Growth Model Calculator employs the following formula:
V0 = D1 / (r – g)
Where:
- V0 is the intrinsic value of the stock today.
- D1 is the expected dividend per share one year from now.
- r is the required rate of return or discount rate.
- g is the expected dividend growth rate.
General Terms Table
| Term | Description |
|---|---|
| Intrinsic Value | The true value of an asset based on its cash flow |
| Dividend per Share (D1) | The expected dividend payout per share in the next year |
| Required Rate of Return | The minimum rate of return investors expect to earn from the investment |
| Dividend Growth Rate | The rate at which dividends are expected to grow annually |
Example of Dividend Growth Model Calculator
Let’s consider an example to illustrate how the Calculator works. Suppose Company XYZ is expected to pay a dividend of $2 per share next year (D1), and investors require a 10% rate of return (r) on their investment. Additionally, the expected dividend growth rate (g) for Company XYZ is 5% per year.
Using the formula:
V0 = 2 / (0.10 – 0.05)
V0 = $40
Therefore, according to the Calculator, the intrinsic value of Company XYZ’s stock today is $40 per share.
Most Common FAQs
A: The Calculator is used by investors to estimate the intrinsic value of a stock based on its expected future dividends. It helps investors make informed decisions about whether to buy, hold, or sell a particular stock.
A: The accuracy of the Dividend Growth Model Calculator depends on the accuracy of the inputs provided by the user, such as the expected dividend per share, the required rate of return, and the dividend growth rate. While the calculator provides a useful estimate of intrinsic value, investors should also consider other factors and perform additional analysis before making investment decisions.