# Equity Valuation - Dividend Discount Model

The analyst can use a variety of models to estimate the intrinsic value of equities. One such model is the Dividend Discount Model. Under this model the value of a stock is calculated as the present value of all future dividends from the stock.

As you can see in the above video, the general form of the model shows that the stock value is equal to the present value of all cash flows, where D is the dividend for each period, k is the required rate of return on common equity, and V is the current stock value. Calculating the value of stock using this formula is impractical as we cannot determine the dividends for each period till infinity. A normal assumption is that an investor will hold the asset for a period and then sell it. With such an assumption, it becomes easy to calculate the stock value.

The one year holding period DDM assumes that the investor holds the stock only for one year and then sells it at the end of the year. In this scenario, the current stock value can be calculated using the dividend discount model if we know how much dividend will be paid at the end of the year and at what price the investor will be able to sell the asset.

# Checkout our eBooks and Templates

eBooks and templates related to finance, R programming, Python, and Excel.
Visit Store
Get our Data Science for Finance Bundle for just $29$51. That's 43% OFF.
Get it for $51$29