CFA CFA Level 1 Dividend Discount Model

Dividend Discount Model

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    • mbnmichael17
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      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?

    • bostonCFA2014
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      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

    • SamC
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      I despise DDM, really struggling with it

    • vincentt
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      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
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      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….

    • mbnmichael17
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      This has really helped me on answering questions. Finally passing some mock exams (with a 70…)! Thanks!

    • CedricJ
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      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?

    • bostonCFA2014
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      D1/E1 = payout rate, retention rate = 1- payout

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