Question

How many dividends are assumed to be paid in the future by the dividend discount mode?

Answer 1

The dividend discount model assumes that the firm is an ongoing entity and it will keep on paying dividends forever at a constant growth rate.

Assume a firm will be paying $5 next year and it will keep on increasing the dividend at the rate of 5%, if the Required Return from the stock is 10%, then what is the stock price.

Stock Price = Next Period Dividend / (Required return - Constant Growth rate)

= 5 / (10% - 5%)

= 100

So dividend discount model assumes that a firm will keep on paying dividends forever.

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