Discounted Dividend Model (DDM)

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Definition: Discounted Dividend Model (DDM)

It is one of the models to calculate the price of an equity share. The dividends are discounted to its present value after factoring the expected growth rate.

This method is useful only when the company pays regular dividends. The trend in the growth is observed and an appropriate growth rate is determined. This growth rate can also be determined by multiplying the ROE with the RETENTION RATE (the proportion of profits which are retained in the business)

Price of a Share:            D

                                         R – g

Here D = Estimated dividend

R = Rate of discount

g = Growth rate (or) ROE*retention rate

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