Advantages And Disadvantages Of The Dividends Discount Model

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In this paper, a study on the Dividends Discount Model (DDM) will be explored and explained. The four main topics that this essay will be based around include what two common share valuation techniques are used, the dividend discount model and the use of a multiples approach, a discussion on the relative advantages and disadvantages of dividend discount model and a look into which model would produce the most accurate results and Why? With the relevant content, research, and analysis of these specific topics, an understanding of these methods and procedures will be the overall objective and purpose of this paper.

Formula = Dividend per share Discount rate – Dividend growth rate Dividend discount
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The past plays a big part in the future when it comes to dividends, if there has been a strong growth in dividends in the past then future dividend growth is predicted signaling a strong bottom-line and profits for the company.

Advantages of the DDM are that it is frequently used when calculating share prices, due to it being easily taught and its simplicity making it easy to understand. DDM also has the ability to give value to a company’s stock, disregarding the current market making it easy to compare across different companies and industries big or small. Another advantage is the models rely firmly on theory and also its ability to stay consistent over the lifetime of the company.
Disadvantages of the DDM include the model itself not appreciating certain factors such as customer and brand loyalty and the ownership of intangible assets. Factors that are vital towards the success value of a company. Another disadvantage is the DDM being highly dependent on the assumption of the company’s growth in dividends believing that it’s rate is stable and known. DDM states the fact that stock prices are fragile to the chosen growth rate of dividends, eliminating the ability for the rate to surpass the cost of equity, which in some cases isn’t always

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