The dividend discount model template allows investors to value a company base on future dividend payments. This is based on the theory that the intrinsic value of the company is equal to all future dividends discounted back to the present day.
This template includes the following types of dividend discount models :
- Multi-Period Discount Model - Net Income Growth
- Multi-Period Discount - Dividend Growth
- Gordon Growth Discount Model
Overview of the Dividend Discount Model Template
The DDM template allows users to make assumptions such as payout ratio, beta, and growth rate to suit specific companies they are valuing.
Multi-Period Discount Model - Net Income Growth
This method of valuing a company forecasts dividends using net income. It starts with determining the growth rate of the net income and then the payout ratio. By multiplying the payout ratio by the net income, users will get the expected dividends. The multi-period model assumes the growth rate of net income changes over time. For this model, growth rate declines after 2021.
Multi-Period Discount Model - Dividend Growth
Similarly to the previous model, this method also assume that the growth rate changes over time. For this method, users make assumptions on the growth rate of dividends instead of net income. When forecasting the dividend using the perpetuity method, the growth rate of dividend decreased to 0.5%,
Gordon Growth Discount Model
The Gordon growth discount model defers slightly from the other methods. This model assumes the dividends will increase at the same rate indefinitely. To get the intrinsic value of the company, dividends are forecasted to the next period and then dividend by (cost of equity - growth rate).
Why does it matter?
This dividend discount model template provides an easy way for users to gain an understanding of the different ways to discount dividends. Using this template will allow investors to quickly gain an idea of the intrinsic value or implied share price of a company before building a more in-depth model.