Financial Terms constant-growth dividend discount model

# Definition of constant-growth dividend discount model

## constant-growth dividend discount model

Version of the dividend discount model in which dividends grow at a constant rate.

# Related Terms:

the present value of a finite stream of cash flows for every beginning \$1 of cash flow.

## DLOC (discount for lack of control)

an amount or percentage deducted from a pro rata share of the value of 100% of an equity interest in a business, to reflect the absence of some or all of the powers of control.

## DLOM (discount for lack of marketability)

an amount or percentage deducted from an equity interest to reflect lack of marketability.

## economic components model

Abramsâ€™ model for calculating DLOM based on the interaction of discounts from four economic components.
This model consists of four components: the measure of the economic impact of the delay-to-sale, monopsony power to buyers, and incremental transactions costs to both buyers and sellers.

## discount rate

the rate of return on investment that would be required by a prudent investor to invest in an asset with a specific level risk. Also, a rate of return used to convert a monetary sum, payable or receivable in the future, into present value.

## fractional interest discount

the combined discounts for lack of control and marketability. g the constant growth rate in cash flows or net income used in the ADF, Gordon model, or present value factor.

## Gordon model

present value of a perpetuity with growth.
The end-ofyear Gordon model formula is: 1/(r - g)
and the midyear formula is: SQRT(1 + r)/(r - g).

## log size model

Abramsâ€™ model to calculate discount rates as a function of the logarithm of the value of the firm.

## QMDM (quantitative marketability discount model)

model for calculating DLOM for minority interests r the discount rate

## Accretion (of a discount)

In portfolio accounting, a straight-line accumulation of capital gains on discount
bond in anticipation of receipt of par at maturity.

## Arbitrage-free option-pricing models

Yield curve option-pricing models.

## Asset pricing model

A model for determining the required rate of return on an asset.

## Asset pricing model

A model, such as the Capital Asset Pricing model (CAPM), that determines the required
rate of return on a particular asset.

## Bank discount basis

A convention used for quoting bids and offers for treasury bills in terms of annualized
yield , based on a 360-day year.

## Binomial option pricing model

An option pricing model in which the underlying asset can take on only two
possible, discrete values in the next time period for each value that it can take on in the preceding time period.

## Black-Scholes option-pricing model

A model for pricing call options based on arbitrage arguments that uses
the stock price, the exercise price, the risk-free interest rate, the time to expiration, and the standard deviation
of the stock return.

## Capital asset pricing model (CAPM)

An economic theory that describes the relationship between risk and
expected return, and serves as a model for the pricing of risky securities. The CAPM asserts that the only risk
that is priced by rational investors is systematic risk, because that risk cannot be eliminated by diversification.
The CAPM says that the expected return of a security or a portfolio is equal to the rate on a risk-free security

## Cash discount

An incentive offered to purchasers of a firm's product for payment within a specified time
period, such as ten days.

## Cash dividend

A dividend paid in cash to a company's shareholders. The amount is normally based on
profitability and is taxable as income. A cash distribution may include capital gains and return of capital in

## Constant-growth model

Also called the Gordon-Shapiro model, an application of the dividend discount
model which assumes (1) a fixed growth rate for future dividends and (2) a single discount rate.

With dividend.

## Cumulative dividend feature

A requirement that any missed preferred or preference stock dividends be paid
in full before any common dividend payment is made.

## Deep-discount bond

A bond issued with a very low coupon or no coupon and selling at a price far below par
value. When the bond has no coupon, it's called a zero coupon bond.

## Deterministic models

Liability-matching models that assume that the liability payments and the asset cash
flows are known with certainty. Related: Compare stochastic models

## Discount

Referring to the selling price of a bond, a price below its par value. Related: premium.

## Discount bond

Debt sold for less than its principal value. If a discount bond pays no interest, it is called a
zero coupon bond.

## Discount factor

Present value of \$1 received at a stated future date.

## Discount period

The period during which a customer can deduct the discount from the net amount of the bill
when making payment.

## Discount rate

The interest rate that the Federal Reserve charges a bank to borrow funds when a bank is
temporarily short of funds. Collateral is necessary to borrow, and such borrowing is quite limited because the
Fed views it as a privilege to be used to meet short-term liquidity needs, and not a device to increase earnings.

## Discount securities

Non-interest-bearing money market instruments that are issued at a discount and
redeemed at maturity for full face value, e.g. U.S. Treasury bills.

## Discount window

Facility provided by the Fed enabling member banks to borrow reserves against collateral
in the form of governments or other acceptable paper.

## Discounted basis

Selling something on a discounted basis is selling below what its value will be at maturity,
so that the difference makes up all or part of the interest.

## Discounted cash flow (DCF)

Future cash flows multiplied by discount factors to obtain present values.

## Discounted dividend model (DDM)

A formula to estimate the intrinsic value of a firm by figuring the
present value of all expected future dividends.

## Discounted payback period rule

An investment decision rule in which the cash flows are discounted at an
interest rate and the payback rule is applied on these discounted cash flows.

## Discounting

Calculating the present value of a future amount. The process is opposite to compounding.

## Dividend

A dividend is a portion of a company's profit paid to common and preferred shareholders. A stock
selling for \$20 a share with an annual dividend of \$1 a share yields the investor 5%.

## Dividend clawback

With respect to a project financing, an arrangement under which the sponsors of a project
agree to contribute as equity any prior dividends received from the project to the extent necessary to cover
any cash deficiencies.

## Dividend clientele

A group of shareholders who prefer that the firm follow a particular dividend policy. For
example, such a preference is often based on comparable tax situations.

## Dividend discount model (DDM)

A model for valuing the common stock of a company, based on the
present value of the expected cash flows.

## Dividend growth model

A model wherein dividends are assumed to be at a constant rate in perpetuity.

## Dividend limitation

A bond covenant that restricts in some way the firm's ability to pay cash dividends.

## Dividend payout ratio

Percentage of earnings paid out as dividends.

## Dividends per share

Amount of cash paid to shareholders expressed as dollars per share.

## Dividend policy

An established guide for the firm to determine the amount of money it will pay as dividends.

## Dividend rate

The fixed or floating rate paid on preferred stock based on par value.

## Dividend reinvestment plan (DRP)

Automatic reinvestment of shareholder dividends in more shares of a
company's stock, often without commissions. Some plans provide for the purchase of additional shares at a
discount to market price. dividend reinvestment plans allow shareholders to accumulate stock over the Long
term using dollar cost averaging. The DRP is usually administered by the company without charges to the
holder.

## Dividend rights

A shareholders' rights to receive per-share dividends identical to those other shareholders receive.

## Dividend yield (Funds)

Indicated yield represents return on a share of a mutual fund held over the past 12
months. Assumes fund was purchased 1 year ago. Reflects effect of sales charges (at current rates), but not
redemption charges.

## Dividend yield (Stocks)

Indicated yield represents annual dividends divided by current stock price.

## Dividends per share

dividends paid for the past 12 months divided by the number of common shares
outstanding, as reported by a company. The number of shares often is determined by a weighted average of
shares outstanding over the reporting term.

## Documented discount notes

Commercial paper backed by normal bank lines plus a letter of credit from a
bank stating that it will pay off the paper at maturity if the borrower does not. Such paper is also referred to as
LOC (letter of credit) paper.

## Extra or special dividends

A dividend that is paid in addition to a firm's "regular" quarterly dividend.

## Extrapolative statistical models

models that apply a formula to historical data and project results for a
future period. Such models include the simple linear trend model, the simple exponential model, and the
simple autoregressive model.

## Ex-dividend

This literally means "without dividend." The buyer of shares when they are quoted ex-dividend
is not entitled to receive a declared dividend.

## Ex-dividend date

The first day of trading when the seller, rather than the buyer, of a stock will be entitled to
the most recently announced dividend payment. This date set by the NYSE (and generally followed on other
US exchanges) is currently two business days before the record date. A stock that has gone ex-dividend is
marked with an x in newspaper listings on that date.

## Factor model

A way of decomposing the factors that influence a security's rate of return into common and
firm-specific influences.

## Forward discount

A currency trades at a forward discount when its forward price is lower than its spot price.

## Garmen-Kohlhagen option pricing model

A widely used model for pricing foreign currency options.

## Growth manager

A money manager who seeks to buy stocks that are typically selling at relatively high P/E
ratios due to high earnings growth, with the expectation of continued high or higher earnings growth.

## Growth opportunity

Opportunity to invest in profitable projects.

## Growth phase

A phase of development in which a company experiences rapid earnings growth as it produces
new products and expands market share.

## Growth rates

Compound annual growth rate for the number of full fiscal years shown. If there is a negative
or zero value for the first or last year, the growth is NM (not meaningful).

## Growth stock

Common stock of a company that has an opportunity to invest money and earn more than the
opportunity cost of capital.

Sale of some shares of stock to get cash that would be similar to receiving a cash dividend.

## Index model

A model of stock returns using a market index such as the S&P 500 to represent common or
systematic risk factors.

## Indicated dividend

Total amount of dividends that would be paid on a share of stock over the next 12 months
if each dividend were the same amount as the most recent dividend. Usually represent by the letter "e" in
stock tables.

## Internal growth rate

Maximum rate a firm can expand without outside source of funding. growth generated
by cash flows retained by company.

## Liquidating dividend

Payment by a firm to its owners from capital rather than from earnings.

## Market model

This relationship is sometimes called the single-index model. The market model says that the
return on a security depends on the return on the market portfolio and the extent of the security's
responsiveness as measured, by beta. In addition, the return will also depend on conditions that are unique to
the firm. Graphically, the market model can be depicted as a line fitted to a plot of asset returns against
returns on the market portfolio.

## Modeling

The process of creating a depiction of reality, such as a graph, picture, or mathematical
representation.

## Net present value of growth opportunities

A model valuing a firm in which net present value of new
investment opportunities is explicitly examined.

## Original issue discount debt (OID debt)

Debt that is initially offered at a price below par.

## Perfect market view (of dividend policy)

Analysis of a decision on dividend policy, in a perfect capital
market environment, that shows the irrelevance of dividend policy in a perfect capital market.

## Pie model of capital structure

A model of the debt/equity ratio of the firms, graphically depicted in slices of
a pie that represent the value of the firm in the capital markets.

## Present value of growth opportunities (NPV)

Net present value of investments the firm is expected to make
in the future.

## Pure-discount bond

A bond that will make only one payment of principal and interest. Also called a zerocoupon
bond or a single-payment bond.

## Residual dividend approach

An approach that suggests that a firm pay dividends if and only if acceptable
investment opportunities for those funds are currently unavailable.

## Single factor model

A model of security returns that acknowledges only one common factor.
See: factor model.

## Single index model

A model of stock returns that decomposes influences on returns into a systematic factor,
as measured by the return on the broad market index, and firm specific factors.

## Signaling view (on dividend policy)

The argument that dividend changes are important signals to investors

## Simple compound growth method

A method of calculating the growth rate by relating the terminal value to
the initial value and assuming a constant percentage annual rate of growth between these two values.

## Simple linear trend model

An extrapolative statistical model that asserts that earnings have a base level and
grow at a constant amount each period.

## Single-index model

Related: market model

## Special dividend

Also referred to as an extra dividend. dividend that is unlikely to be repeated.

## Stochastic models

Liability-matching models that assume that the liability payments and the asset cash flows
are uncertain. Related: Deterministic models.

## Stock dividend

Payment of a corporate dividend in the form of stock rather than cash. The stock dividend
may be additional shares in the company, or it may be shares in a subsidiary being spun off to shareholders.
Stock dividends are often used to conserve cash needed to operate the business. Unlike a cash dividend, stock
dividends are not taxed until sold.

## Sustainable growth rate

Maximum rate of growth a firm can sustain without increasing financial leverage.

## Tax differential view ( of dividend policy)

The view that shareholders prefer capital gains over dividends,
and hence low payout ratios, because capital gains are effectively taxed at lower rates than dividends.

## Traditional view (of dividend policy)

An argument that "within reason," investors prefer large dividends to
smaller dividends because the dividend is sure but future capital gains are uncertain.

## Two-factor model

Black's zero-beta version of the capital asset pricing model.

## Two-state option pricing model

An option pricing model in which the underlying asset can take on only two
possible (discrete) values in the next time period for each value it can take on in the preceding time period.
Also called the binomial option pricing model.

## Value-at-Risk model (VAR)

Procedure for estimating the probability of portfolio losses exceeding some
specified proportion based on a statistical analysis of historical market price trends, correlations, and volatilities.

## With dividend

Purchase of shares in which the buyer is entitled to the forthcoming dividend. Related: exdividend.

## Yield curve option-pricing models

models that can incorporate different volatility assumptions along the
yield curve, such as the Black-Derman-Toy model. Also called arbitrage-free option-pricing models.

## Dividend

A payment a company makes to stockholders. Earnings before income tax. The profit a company made
before income taxes.

## Discounted cash flow (DCF)

A method of investment appraisal that discounts future cash flows to present value using a discount rate, which is the risk-adjusted cost of capital.

## Dividend

The payment of after-tax profits to shareholders as their share of the profits of the business for an accounting period.

## Dividend income

Income that a company receives in the form of dividends on stock in other companies that it holds.