Dividend Discount Model (DDM)
Watch the video, Dividend Discount Model (DDM) (Links to an external site.).
Select a publicly traded company that pays dividends. You may select any publicly traded company that pays dividends, or choose one of the companies discussed in 65 Best Dividend Stocks You Can Count On in 2021 (Links to an external site.).
Determine the most recent stock price and the total dividends paid over the past year.
Calculate the current dividend yield on the stock.
Calculate the required rate of return (Ke) for an investment in the common stock. You should use formula 10-9 in the textbook to do this calculation and use an assumed growth rate of 5%.
Identify the current P/E ratio for the company from a source such as Yahoo! Finance or Barron’s.
In your post,
Show your calculations of the dividend yield and required rate of return (Ke), and present the P/E ratio.
Explain the relationship between your chosen company’s Ke and P/E ratio and what that relationship indicates about the risk of the company’s future cash flows.
Explain whether the general relationship between a high Keand a low P/E ratio (or low Ke and high P/E ratio) is supported by the data for your chosen publicly traded company.
Predict the impact on the company’s stock price based on your forecast that the company will grow its dividends by a rate higher than 5%.
Compare your company’s P/E ratio with the P/E ratios of two other companies in its industry.
Hypothesize which company in this industry should have the lowest Ke based on the P/E comparisons.
Summarize the connection between a company’s growth rate, its required rate of return, and its value (stock price).
