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In financial statement analysis, does the dividend discount model provide a good valuation for equity and...

In financial statement analysis, does the dividend discount model provide a good valuation for equity and why? Please explain precisely.

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Answer #1

Dividend discount model is the method of valuing the equity of the company. As per the theory, the stock price is the present value of all the future dividend.

Formula of DDM (Gordan's model)

Price0 = Dividend1 / (Cost of equity (r) - Gowth rate )

This theory cover the future dividend and takes their present value. It also consider the growth rate that is prevaling in the market. Therefore it can be said that it is the most widely used method of valuation of equity.

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