Dividend discount models are designed to compute the intrinsic value of a share of common stock under specific assumption as to the expected growth pattern of future dividends and the appropriate discount rate to employ.
According to the dividend discount model, the value of an equity share is equal to the present value of dividends expected from its ownership plus the present value of the sale price expected when the equity share is sold.
Following assumptions are made for applying the dividend discount model.
- Dividends are paid annually – it is a common practice for business firms in India.
- The first dividend is received one year after the equity share is
