CFA CFA Level 1 Dividend Discount Model

Dividend Discount Model

  • Author
    Posts
    • Avatar of CedricJCedricJ
      Participant
        • CFA Level 2
        Up
        6
        ::

        I got the wrong answers on one of these questions and it stated the correct answer as:
        (D1 / E1) / r-g

        Why would you use retention rate as the numerator?

      • Avatar of vincenttvincentt
        Participant
          • CFA Level 3
          Up
          4
          ::

          Gordon’s DDM always use the next year’s dividend. It’s not too hard if you comply to a couple of rules.

          Look for what it says about the dividend $x. For example, “just paid a dividend $x” then you must get next year’s dividend by multiplying it with the growth rate (1 + g). If it states something like next year’s dividend will be $x then just use $x.

          Make sure you know this well as you will be seeing these again in L2 with a few more variations.

        • Avatar of mitch895mitch895
          Participant
            • CFA Charterholder
            Up
            3
            ::

            As @bostonCFA2014 says, they are actually the same formula but rearranged. The DDM is one of those things that once you practice it a few times you should get the hang of it….

          • Up
            2
            ::

            D(1+g)/k^t – Multistage DDM, use this when there are multiple periods w/ different dividend growth rates that need to discounted back along w/ PN (once growth levels off) to solve P0.

            D1/k-g – Constant growth/Gordon, use this when g is constant to solve P0 (mature, established companies).

            D1/P0 + g – similar to the above w/ formula rearranged to solve for k/yield. If preferred, g = 0.

            g = ROE x Retention Rate

            Earnings Multiple = payout rate/k-g

          • Up
            2
            ::

            I despise DDM, really struggling with it

          • Avatar of mbnmichael17mbnmichael17
            Participant
              • CFA Level 2
              Up
              2
              ::

              This has really helped me on answering questions. Finally passing some mock exams (with a 70…)! Thanks!

            • Up
              1
              ::

              D1/E1 = payout rate, retention rate = 1- payout

          Viewing 6 reply threads
          • You must be logged in to reply to this topic.