Dividend Discount Model (DDM)

This video illustrates how to value a firm's share price using a dividend discount model. The Gordon growth model equation is presented and then applied to sample problem to demonstrate how the Dividend Discount Model yields an estimate share price for a firm.
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[@terrierlover]

finally!!! somebody who speaks like a normal person and not a robot explaining ddm! thanks!

[@claudiadentu2361]

GREAT! Can you do a video on NPVGO? I am doing corporate finance this semester your videos are helping alot but it seems none of your videos covers some of the main topics we are treating in class . Topics such as unlevered and levered Cash Flows, exchange rates, etc. Thank you for the great videos once again! My managerial accounting class last year was a success with the help of your videos.

[@bhagatsingh5019]

Thank you for your all beautifully explained videos.

[@Edspira]

Happy to help!

[@max-zl1vm]

Love these videos

[@Edspira]

Thank you!

[@danielmathivathan7391]

been watching all your lesson, brilliant way of explaining and making sense of topics which would otherwise be impossible to understand - thank you!

[@Edspira]

You're very welcome!

[@ZanasRadzys]

Great content but I got only 2 questions. What to do if the Cost of equity is lower than the Dividend Growth? Can we also calculate it not for infinity but let's say for the next 10-15 years..?

[@arungautam3454]

In that case your growth would be such that you'd take over every single firm on the planet and maybe a few centuries later, you'd be the master of the universe.

[@vedanthikale310]

Sometimes, The value of the share is also calculated by using P= D (1+g)/r-g. Why is this so? Why do we multiply the dividend with (1+g) in some cases? And where do I apply which formula?

[@antonioromero878]

D(1+g)/r-g is solving for the dividend at the end period which is D1. D(1+g)/r-g equates to D1/r-g. If you are assuming that the dividend will have no growth and be sustained as is, you would just use the current dividend amount and exclude (1+g).

[@vedanthikale310]

@@antonioromero878 Thank you. That helped 👍🏼

[@miked6523]

Isn’t the numerator the expected dividend growth formula = Dividend Per Share x (1+Growth Rate)?

[@LDacic]

That IS the next year's dividend.

[@seefany]

This is so helpful! Thanks for this great video!

[@Edspira]

No problem!

[@aden4546]

what do we do if cost of equity>constant growth rate of dividends?

[@giselgonzalez8920]

I get so happy when I Google these topics and I see you have videos on them. I really enjoy your explanations thank you so much!!!

[@Edspira]

You're very welcome!

[@nomagent]

God bless you man! you are a goldmine for this US economy and investors!

[@sanjaygautam8327]

love from INDIA

[@Edspira]

😀

[@joshuamuzanima871]

Anyone else also doing charterd accountin here.....

[@DuongNguyen-rg3fr]

thansk for the beautiful explained video btw. i didnt know that Chef John from Food wishes not only can cooking but also can give finance´s lecture :D

[@Edspira]

Chef John is my brother from another mother 😎

[@tess2049]

it's 2021 and this video saved my academic life tysm

[@dancerforever1313]

Do you have a video explaining CAPM? Thanks!

[@rawanwalid2037]

Am gonna ever graduate!

[@RobertoDeMundo]

I searched up DDM as in the meme channel. Now I feel stupid :/

[@snowyempress3647]

Dank doodle memesssssssss

[@far3582]

Thank you for explaining in plain language!

[@AugustNocturne]

This model is pretty useless to be honest...

[@quantstyle6448]

Please note: Many mature firms don't pay dividends. Google, Berkshire, Tesla, Netflix, Amazon, etc. The Ponzi Factor: kzbin.info/www/bejne/bKPIc2WfgtKge8k Thank you for addressing non-dividend stocks because a lot of others simply ignore it when they explain this.

[@khethiwentlekeni5103]

Also problematic if growth rate is > cost of equity as the denominator then becomes negative...

[@susan88888888able]

this model doesn't work though. It's always way to low.

[@ChristopherLopez-g8g]

Barrett Plains

[@arseniotedra4573]

#corporatefinance#ibelieve

[@darrenzaiat8843]

great explanation :)

[@Edspira]

Thank you!

[@jamesandrews6386]

if the required rate of return is 12%, why would an investor chose a stock with an expected growth rate of 3%?

[@swadeep]

+James Andrews That's an expected growth rate of 3% per year in dividends. Doesn't mean company will only grow 3% and stop. Required rate of return is just based on your own preference to determine what you think this stock is worth in the future. Basically it's setting your Margin of Safety. I would see the final intrinsic value from the calculations (based on your input) and then compare with the current stock price. If the market price is below the intrinsic value then the stock is undervalued. Now how much undervalued you want it to be before you would in vest is up to you. But if everything goes as expected and you're happy with the MOS then i don't see a problem investing in that stock.

[@jamesandrews6386]

+swadeepc let's say the company decides to use some common equity instead of paying a dividend for one year. My required rate of return is 12%. Let's say that includes dividends and capital gains next year. The company decides not to pay the dividend because they think that they can do as well or better than my required rate. They think using retained earnings on some high IRR projects and paying a 2% dividend next year will meet my demand. If the stock price doesnt go up, but they pay a 3% dividend, then they failed the stockholders. No investor would keep their money in a company that plans to earn less than their required rate. They must use withheld divs to grow enough and pay a large enough dividend to pay what stockholders are expecting or could earn with alternative investments.

[@jamesandrews6386]

+swadeepc doesnt the required rate of return have to be lower than the expected growth for this model to work? If anything, that should have been your answer. Basically my question was, why would anyone use this model if the only way it works is if you change the assumptions to something that makes no sense?

[@shaochiavang]

@@jamesandrews6386 bc the growth rate is for the dividend..the dividend growth, not the company's growth. And yes, your are right... the dividend discount model is all assumptions. You have to look at a company's historic dividend growth rate and the cost of equity.

[@JamesonSharp]

Great Video! 👍🙌👍

[@Edspira]

Thanks!

[@amongusbot2049]

i bet someone looking for dank doodle memes came across this lol...

[@max-zl1vm]

but what about calculating future stock prices?

[@Edspira]

You could discount the expected stream of dividends per share (going forward from the future date). For example, let's assume you are interested in what the stock price of a firm will be on January 1, 2047. You could ask yourself what the dividends per share will be after January 1, 2047 and then discount those cash flows to the value as of January 1, 2047 (the present value as of January 1, 2047). The further you get into the future, the more difficult it is to predict what the dividend stream will be, so the estimate of the future stock price will be less reliable.

[@neelmoradiya1389]

🇮🇳🇮🇳🙏🙏👍👍

[@shaochiavang]

Shouldn't this equation be D(1+g) / r - g

[@jackrussel891]

It is basically the same.Indeed your D(1+g) represent next period D1. He simplified a lot in order that audience get the idea and he made a good job.

[@antonioromero878]

Its the same formula. D(1+g)/r-g results in D1/r-g. D(1+g) is solving for the dividend at the end period.

[@TheTripMachine]

Thanks Very Helpful video

[@hanxue3763]

well explained .. what if the company doesn't pay dividend , how do you get intrinsic value of the company using DDM? thank you for putting this great educational video togehter

[@Edspira]

Great question. If the company doesn't pay dividends you could use the Discounted Cash Flow (DCF) model. However, if it is a start-up company that hasn't earned a profit yet you might compare the company to other companies with a similar business model

[@sumitlulla3118]

you can use the cash inflows every year

[@preciousjoseph576]

Thank you.

[@mrbig334]

THE MAN

[@danielelkadi3499]

Thank you!

[@anhphuongnguyen7665]

thank you so much!!!

[@MoisesMolz-z5c]

Cary Harbors

[@gnlilu6972]

Thank you for this. I used it in my quiz 📝

[@mritorto1]

should you use expectate rate of return

[@learningislamanditsbenefit7761]

i like ur voice sir

[@Edspira]

Thank you!

[@raff4459]

Great video, Its exactly what I needed

[@syukrinazre5617]

Why does required return must less the growth rate? Does this derived from any other formula?

[@shaochiavang]

Required return has to always be more than growth.

[@attiah99]

thanks... :)

[@axeljimenez1561]

Thank youuuuu!

[@Clifffffffffford]

👍

[@RaferJeffersonIII]

So, what if the growth rate is 20% and RE is 10%. 0.1 - 0.2 = -0.1 Negative, doesn’t make sense.

[@antonioromero878]

The formula doesn't work if the discount rate is equal to or smaller than the growth rate. That implies that the firm has negative cashflow. Even the most cyclical firms have a positive revenue stream, regardless if net income is negative or not.

[@RaferJeffersonIII]

@@antonioromero878 I thought Re was the risk free rate (I.e base rate)? Or an equivalent contemporary return on capital in the sector. As in when you’re doing a lot of other discounting techniques. I’m struggling to understand what the required rate of return is in context. I was looking at this more in terms of Re = equivalent market rate or RFR and Growth = the dividend growth rate.

[@antonioromero878]

@@RaferJeffersonIII The required rate of return is just the return you require to compensate you for taking the risk of owning the equity. The "discount rate" D(r). It is very subjective.

[@antonioromero878]

If you want to be by the book, then you would use WACC as your discount rate when solving for the required rate of return. Same principle applies when discounting FCFF

[@RaferJeffersonIII]

@@antonioromero878 thank you, very helpful

[@ronzaqusous9453]

Change the black color for the background 😣😣😣 and the neon lights 😭😭

[@RobertoDeMundo]

Why

[@pranavverma16]

2020

[@fivefingersinmyass5979]

Nobody cares

[@andydidyouhear]

There's a whole bunch of assumptions in this model. How reliable can they possibly be?

[@antonioromero878]

Everything is subjective.

[@fivefingersinmyass5979]

Um i was looking for ddm as dank doodle memes... i want nothing tp do with math. no offense! Im saving algebra for later

[@mushroomsoup1991]

I came here for dividend discount model but I am gonna go look for dank doodle memes for now

[@fivefingersinmyass5979]

@@mushroomsoup1991 Lol