Dividend Discount Model¶

The dividend discount model is a way to value a company based off its dividend payments. In the most basic case, we assume that a dividend is going to be paid every single year and it is going to be the same dividend every year. You may guess that we can model it as a perpetuity to get the value of all the payments discounted to the current time. In this case then, the value of a share of a stock would be equal to the dividend as a perpetuity like this:

$$ S = \frac{D_1}{r} $$

$ S = \text{Share Price} $

$ D_1 = \text{Dividend at year 1} $

$ r = \text{The discount rate} $