Talk:Dividend discount model

Requested move

The following discussion is an archived discussion of a requested move. Please do not modify it. Subsequent comments should be made in a new section on the talk page. No further edits should be made to this section.

The result of the move request was: page moved. Vegaswikian (talk) 21:43, 20 October 2011 (UTC)

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Dividend Discount Model → Dividend discount model –

Per WP:CAPS ("Wikipedia avoids unnecessary capitalization") and WP:TITLE, this is a generic, common term, not a propriety or commercial term, so the article title should be downcased. Lowercase will match the formatting of related article titles, including the "See also" Gordon model. Tony (talk) 02:55, 14 October 2011 (UTC)

The above discussion is preserved as an archive of a requested move. Please do not modify it. Subsequent comments should be made in a new section on this talk page. No further edits should be made to this section.

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Don't understand sudden change in equation...

IN the beginning of the page you have the dividend express as D0(1+g). then suddenly in the section entitled "Income plus capital gains..." the equation changes to simply " D " . ???--Roxette5 (talk) 11:34, 26 October 2017 (UTC)

Wrong Derivation

You don't understand this model. There is no D0(1+g). The correct derivation:

P0 = D1/(1+r) + D1*(1+g)/(1+r)^2 + D1*(1+g)^2/(1+r)^3 + ... ,

where

P0 - the present intrinsic stock value (at t = 0)

D1 - a dividend in the next period (so at t = 1)

r - cost of equity

g - growth rate

D1/(1+r) + D1*(1+g)/(1+r)^2 + D1*(1+g)^2/(1+r)^3 + ... =

= 1/(1+r) [D1 + D1*(1+g)/(1+r) + D1*(1+g)^2/(1+r)^2 + ... ] =

= 1/(1+r) * A , where

A = D1 + D1*(1+g)/(1+r) + D1*(1+g)^2/(1+r)^2 + ...

We use Geometric series - Wikipedia so that for r < 1:

A = D1 / [1 - (1+g)/(1+r) ] = D1*(1+r) / (r - g)

Then we go back to P0:

P0 = 1/(1+r) * A = 1/(1+r) * D1*(1+r) / (r - g) = D1 / (r - g)

So you see that I don't use the present dividend and only start from t = 1 and D1. That means that Gordon's model is more flexible than you assume. Pawel.jamiolkowski (talk) 19:35, 10 June 2024 (UTC)

@Pawel.jamiolkowski Greetings! My comments:

1) The equations related to Gordon's constant growth DDM lack inline citations to reliable sources. 2) Related Methods has no inline citations to reliable sources. 3) Related Methods does not state that the DCF formula includes the expected sales price of the stock at the end of the holding period. Intrinsic value of a stock = PV of future dividends + expected sales price of stock at end of holding period. This is explained in the "Dividend Discount Models" section of the university textbook Essentials of Investments, so it belongs here too. I can handle #3. Cordially, BuzzWeiser196 (talk) 13:44, 21 July 2024 (UTC)

Re 1-2) As it written: "Essentials of Investments, Ninth Edition, is intended as a textbook on investment analysis most applicable for a student’s first course in investments." , so I believe that authors try to put the theory in the simplest way to grasp it. The second possibility is that the authors themselves don't understand the topic at the deeper level which I'm explaining now.

Gordon's formula, which your article refers to ("Capital Equipment Analysis: The Required Rate of Profit"), is slightly different, i.e. formula (7):

P0 = D0 / (r - g)

instead of P0 = D1 / (r - g). It is because Gordon and Shapiro assumes that dividends are payed continously, so there is no break between period 0 and 1. The start should be from 1 because of discounting, but artificial assumption of uninterrupted dvidend flow means that there would be no discounting of slightly earlier dividends, e.g. at point 0.5, 0.4, 0.3, 0.2, 0.1, 0.01, 0.001 ...; that's why it must be started from 0. The continuous flow of dividends and their summing causes that the sum becomes the integral and the term (1+x) the exponential function, exp(x). So we get the definite integral from 0 to infinity of

D0*exp(g)^t / exp(r)^t = D0*exp(g*t)/ exp(r*t).

It can be shown that, if g < r, this equals to D0/(r-g) [see].

We can reconcile both approaches, discrete and continuous, in the following way. Let's artificially split the integral into periods from 0:

P0 = D0*(1+g)^0/(1+r)^0 + D0*(1+g)/(1+r)^1 + D0*(1+g)^2/(1+r)^2 + ...

P0 = D0 + D0*(1+g)/(1+r)^1 + D0*(1+g)^2/(1+r)^2 + ...

P0 - D0 = D0*(1+g)/(1+r)^1 + D0*(1+g)^2/(1+r)^2 + ...

P0' = D0*(1+g)/(1+r)^1 + D0*(1+g)^2/(1+r)^2 + ...

where P0' = P0 - D0, is the price at t = 0 without the current dividend (share quoted ex-dividend)

Now we can write it in the form:

P0' = D1/(1+r)^1 + D1*(1+g)^1/(1+r)^2 + ...

And following the same path as I showed in the previous comment, we get:

P0' = D1 / (r - g).

But in this case it is true that D1 = D0*(1+g).

So your derivation (and that textbook) would be correct for the valuation of an ex-dividend share, which assumes that there is the current dividend (just payed).

Re 3) It is only necessary to add the assumption g < r, which removes the requirement for the value at the end of the period, since on the one hand the end is extended to infinity and on the other hand the term zeroes out. However I missed this condition, so you correctly pointed this out. Pawel.jamiolkowski (talk) 19:01, 5 August 2024 (UTC)

I actually changed my mind, this derivation is consistent with the original Gordon model even if in discrete form. In fact it is more like the Williams model ("The Theory of Investment Value", p. 88, formula 17a). Pawel.jamiolkowski (talk) 01:30, 7 August 2024 (UTC)

Everything except the lead lacks inline citations to a reliable source

Greetings Wikipedians! This violates Wikipedia's policy on verifiability, which states: "Even if you are sure something is true, it must be verifiable before you can add it....The burden to demonstrate verifiability lies with the editor who adds or restores material, and it is satisfied by providing an inline citation to a reliable source that directly supports the contribution." The lack of citations for all those equations is particularly troubling. Give us the sources! I'll let this rest for a while and hope someone will rectify this shortcoming. Cordially, BuzzWeiser196 (talk) 13:07, 14 July 2024 (UTC)