Research Paper on:
Student Questions on the Dividend Discount Model Answered

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used in the dividend discount model, which is a more conservative measure of stock values. The rationale behind this model is that the value of a share should be  calculated by reference to the current value of future dividends. The idea is that the real value is not in the speculation of earnings and the way that the market  behaved, that the best way to measure the value of a stock should be by looking at the money it will produce. This is likely to produce less irrational returns  than those that create the large swings in stock valuations on the stock market. This is therefore a conservative valuing tool. The model is best used when there is a  stock that is making regular dividend payments, but it can be used for other companies as theoretically retained earnings should eventually become dividends. This gives us a model that values  stock only in terms of what is obtained from it. There are two different models that can be used, here we are using the stable model. For this we  need to calculate the input figures. The first figure is the dividends that are expected within one year we will call this DPS(1). The second is the rate of return  that is required for the investment, this is referred to as Ks. This is calculated by taking the risk free rate and adding the market premium rate, and then multiplying  the answer by the beta. The final input is the assumed growth rate for the dividends (g), this is often assumed as equal to the long term growth rate in  the economy calculated by adding inflation to the real rate of growth in the GDP, here we have used a growth rate of 19%, however the student may wih to