CFA CFA Level 1 Dividend Discount Model

# Dividend Discount Model

• Author
Posts
• mbnmichael17
Participant
• CFA Level 2
0

I’m sure this has been asked before, but it trips me up each time.

When do I use D/P + g and when do I use D(1+g)/P + g?

• CedricJ
Participant
• CFA Level 2
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?

• vincentt
Participant
• CFA Level 3
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.

• mitch895
Participant
• CFA Charterholder
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 itâ€¦.

• 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

• 2

I despise DDM, really struggling with it

• mbnmichael17
Participant
• CFA Level 2
2

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

• 1

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