# Dividend Discount Model

The Dividend discount model present stock value. Present stock value equal to expected dividend divided to cost of equity less than expected growth rate.

**Formula us**

Present stock value = Expected dividend / (Cost of equity – Expected growth rate),

**Let us consider,**

**present stock value**is represents how much the stock is currently worth.**expected dividend**is payable in one year – is the amount of cash received in the next dividend period.**cost of equity**– a percentage that represents the minimum rate of return .**expected growth rate of dividend**it is also a percentage value.

## I**1.)Constant growth dividend discount model**

The growth rate equal to number of value 1 less than dividend payout ratio multiple return on equity.

**The Formula us,**

Expected Growth Rate = (1 – Dividend Payout Ratio) * Return on Equity.

**Let us consider,**

**Dividend Payout Ratio**i s the fraction of the company’s earnings paid to the shareholders.**Return on Equity**is a popular business ratio that informs us how profitable a company is in generating profit from its equity.

**Expected Dividend**

Expected dividend equal to dividends per share multiple 1 numbers value added to expected Growth rate.

**Formula us, **

Expected Dividend = Dividends per Share * (1 + Expected Growth Rate),

**2.)Dividend discount model using CAPM – dividend discount model cost of equity**

Cost of equity equal to Risk –free rate added to beta multiple market risk premium.The next step is to calculate the **cost of equity**. A great CAPM calculator that covers this topic.

**Formula us,**

Cost of Equity = Risk-Free Rate + Beta * Market Risk Premium,

**Let us consider,**

**Risk-free rate**is the risk-free interest rate, typically taken as the yield on a long-term government bond in the country where the project is based.**Beta**is market risk – a statistical measure of the variability of a company’s stock price relative the stock market overall.**Market risk premium**is a measure of the**return**that investors require on top of the**risk-free rate**in order to compensate them for the risk of an investment.

**Market risk premium**

Market risk premium equal to market rate of return less than risk free rate of return.

**Formula us,**

Market risk premium = Market Rate of Return – Risk-Free Rate of Return.

**Let us consider,**

**Market rate of return**is a measure of the**return**that investors.**Risk-free rate**is the risk-free interest rate, typically taken as the yield on a long-term government bond in the country where the project is based.

**Example for Expected Growth rate**

The Company X has a dividend payout ratio of 5% and ROE of 3%.

Expected Growth Rate = (1 – Dividend Payout Ratio) * Return on Equity.

Expected Growth Rate = (1 – 0.05) * 0.03 = 0.0299

The answer is = 2.99%.

**Example for Expected Divided**

The company currently pays $5 dividends,

Expected Dividend = Dividends per Share * (1 + Expected Growth Rate),

Expected Dividend = $5* (1 + 0.0299)

The answer is = $5.0299

**Example For Cost of Equity**

The risk-free market rate is 4%, the market risk premium is 6%,

Cost of Equity = Risk-Free Rate + Beta * Market Risk Premium,

Cost of Equity = 0.04+ 1 * 0.06 = 0.1

The answer is = 10%

**Example For present Stock Value**

Present stock value = Expected dividend / (Cost of equity – Expected growth rate),

Present stock value = $5.0229 / (0.1 – 0.0299)

The answer is = $50.19