101 Concepts for the Level I Exam

Essential Concept 48: Dividend Discount Model (DDM)

The value of a stock using DDM for a single-holding period is:

${\mathrm{V}}_0\mathrm{=}\frac{{\mathrm{D}}_{\mathrm{1}}}{{\left(\mathrm{1\ +\ r}\right)}^{\mathrm{1}}}\mathrm{+}\frac{{\mathrm{P}}_{\mathrm{1}}}{{\left(\mathrm{1\ +\ r}\right)}^{\mathrm{1}}}\mathrm{=\ }\frac{{\mathrm{D}}_{\mathrm{1}}\mathrm{\ +\ }{\mathrm{P}}_{\mathrm{1}}}{{\left(\mathrm{1\ +\ r}\right)}^{\mathrm{1}}}$

The value of a stock using DDM for multiple finite holding periods is:

${\mathrm{V}}_0\mathrm{=\ }\sum\limits_{t=1}^{n} {\frac{{\mathrm{D}}_{\mathrm{t}}}{{\left(\mathrm{1+r}\right)}^{\mathrm{t}}}\mathrm{+}\frac{{\mathrm{P}}_{\mathrm{n}}}{{\left(\mathrm{1+r}\right)}^{\mathrm{n}}}}$