Question

According to the dividend discount model, the current stock price of a company is: Group of...

According to the dividend discount model, the current stock price of a company is:

Group of answer choices

the sum of the present values of all future dividends.

the future value of all future dividends.

zero for a zero-growth stock.

constant over time.

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Answer #1

The correct answer is the sum of the present value of all future dividends.

The Dividend Discount Model (DDM) states that current stock price of a company is the sum of present value of all future dividends discounted at the required rate of return. The dividend discount model is a method of equity valuation.
There are two inputs required for valuation under DDM

  1. Forecast of future dividend.
  2. Determination of Required rate of return (Re).

Current Stock Price = D1 / (1+Re) + D2 / (1+Re)2 + D3 / (1+Re)3 + ..... and so on.

Where D1,D2,D3 is Dividend for Year 1,2, 3.

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