The AI (ChatGPT) Dividend Handbook: Dividend Discount Model

Here is the response from ChatGPT for the prompt dividend discount model entered on June 13, 2023

The Dividend Discount Model (DDM) is a method used to value a stock by estimating its intrinsic value based on the present value of its expected future dividends. The underlying assumption of the DDM is that the value of a stock is determined by the cash flows it generates for its shareholders in the form of dividends.

The formula for the Dividend Discount Model is as follows:

Intrinsic Value = (D1 / (1+r)^1) + (D2 / (1+r)^2) + (D3 / (1+r)^3) + ... + (Dn / (1+r)^n)

Where:

• Intrinsic Value represents the estimated fair value of the stock.
• D1, D2, D3, ..., Dn represent the expected dividends to be received at different time periods.
• r denotes the required rate of return or discount rate, which is the minimum return an investor expects to earn from the investment.

In practice, the DDM has various forms, depending on the assumptions made about dividend growth. The most commonly used version is the Gordon Growth Model, also known as the Constant Growth Model. This model assumes that dividends grow at a constant rate indefinitely.


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