Dividend =

Dividend Growth Rate =

Rate of Return =

Stock Price =

The Dividend Discount Model or DDM values the price of a stock by discounting expected dividends to the present value. If the price obtained is higher than the actual trading price then the stock is undervalued.

- Dividend: current dividend

- Dividend Growth Rate: expected growth rate, in perpetuity, of the dividend

- Rate of Return: required rate of return expressed as a percentage

- Stock Price: value of the stock

A stock's dividend is $4.25 and is growing 5% per year. If the rate of return is 10% and the current stock price is $75 per share, is this stock undervalued?

- Dividend: 4.25

- Dividend Growth Rate: 5.000%

- Rate of Return: 10.000%

The calculated stock price is $85 per share which means, according to this model, the stock is undervalued.

Dividend

Dividend Growth Rate

Rate of Return

Stock Price

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DDM