Dividend Discount Model Calculator is an online tool that calculates the value of equity shares in terms of present value. This model assumes that the present value of equity is equal to all its future dividends.
The model states that the dividend will affect the market price of shares. The dividend discount model talks only about dividends. It does not take into account the concept of capital appreciation. According to this model, shareholders are more interested in dividend distribution at a constant rate each year rather than retention of profits.
The major assumption under the dividend discount model is that the growth rate of dividend is constant.
The formula for calculating the value of stock through the dividend discount model is:
Value of Stock = Expected Dividend Per Share / (Cost of equity – Dividend Growth Rate)
Dividend Discount Model Calculator
How to Calculate using Calculator?
In order to calculate the value of a stock using the calculator, the user simply has to insert the following data into the calculator.
Expected dividend per share – It is generally denoted by D1. It is the dividend expected by shareholders. Generally, matured companies with constant growth use this model. The expected dividend per share can be calculated with the help of the following formula.
D1 = D0(1+g)
where D0 = Dividend of the first year
g = Dividend growth rate
Cost of equity – It is denoted by ke. The cost of equity can be defined as the minimum rate of return to be earned to pay off dividends to the shareholders. There are 4 methods available to calculate the cost of equity.
- Dividend method (no growth model)
- Constant growth model (Gordon model)
- Earning model
- Capital Asset Pricing Model (CAPM)
Calculator to calculate the cost of equity using constant dividend growth model – Cost of Equity (Constant Dividend Growth) Calculator
Calculator to calculate the cost of equity using capital asset pricing model – Cost of Equity (CAPM Model) Calculator
Dividend growth rate – Shareholder expects constant growth in dividend each year. This expected growth rate is the dividend growth rate.