 Financial Terms dividend discount model

# Definition of dividend discount model ## dividend discount model

Computation of today’s stock price which states that share value equals the present value of all expected future dividends.

# Related Terms:

## constant-growth dividend discount model

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

## Dividend discount model (DDM)

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

## Discounted dividend model (DDM)

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

## Attribute bias

The tendency of stocks preferred by the dividend discount model to share certain equity
attributes such as low price-earnings ratios, high dividend yield, high book-value ratio or membership in a
particular industry sector.

## Three-phase DDM

A version of the dividend discount model which applies a different expected dividend
rate depending on a company's life-cycle phase, growth phase, transition phase, or maturity phase.

## 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.

a price concession made under competitive pressure (real or imagined) that does not relate to quantity purchased the present value of a finite stream of cash flows for every beginning \$1 of cash flow.

## 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 model

A method of pricing options or other equity derivatives in
which the probability over time of each possible price follows a binomial
distribution. The basic assumption is that prices can move to only two values
(one higher and one lower) over any short time period.

## 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 model

The first complete mathematical model for pricing
options, developed by Fischer Black and Myron Scholes. It examines market
price, strike price, volatility, time to expiration, and interest rates. It is limited
to only certain kinds of options.

## 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

## Capital Asset Pricing Model (CAPM)

A model for estimating equilibrium rates of return and values of
assets in financial markets; uses beta as a measure of asset risk
relative to market risk

## capital asset pricing model (CAPM)

Theory of the relationship between risk and return which states that the expected risk
premium on any security equals its beta times the market risk premium.

## 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

## cash dividend

Payment of cash by the firm to its shareholders.

## 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.

## Continuous Discounting

The process of calculating the present value of a stream of future
cash flows by discounting over a continuous period of time

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

The percentage amount at which bonds sell below their par value. Also the percentage amount at which a currency sells on the forward market below its current rate on the spot market.

## 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 Bond

A bond with no coupons, priced below its face value; the return on this bond comes from the difference between its face value and its current price.

## Discount curve

The curve of discount rates vs. maturity dates for bonds.

## Discount factor

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

## discount factor

Present value of a \$1 future payment.

## 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 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.

## 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 Rate

The rate of interest used to calculate the present value of a stream
of future cash flows

## discount rate

the rate of return used to discount future cash
flows to their present value amounts; it should equal or
exceed an organization’s weighted average cost of capital

## discount rate

Interest rate used to compute present values of future cash flows.

## Discount Rate

The interest rate at which the Fed is prepared to loan reserves to commercial banks.

## Discount Rate

A rate of return used to convert a monetary sum, payable or receivable in the future, into present value.

## 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.

## Discount Window

The Federal Reserve facility at which reserves are loaned to banks at the discount rate.

## 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

A technique that determines the present value of future cash
flows by applying a rate to each periodic cash flow that is derived from the cost of
capital. Multiplying this discount by each future cash flow results in an amount that
is the present value of all the future cash flows.

## Discounted Cash Flow

Techniques for establishing the relative worth of a future investment by discounting (at a required rate of return) the expected net cash flows from the project.

## Discounted cash flow (DCF)

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

## 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.

## discounted cash flow (DCF)

Refers to a capital investment analysis technique
that discounts, or scales down, the future cash returns from an
investment based on the cost-of-capital rate for the business. In essence,
each future return is downsized to take into account the cost of capital
from the start of the investment until the future point in time when the
return is received. Present value (PV) is the amount resulting from discounting
the future returns. Present value is subtracted from the entry
cost of the investment to determine net present value (NPV). The net
present value is positive if the present value is more than the entry cost,
which signals that the investment would earn more than the cost-ofcapital
rate. If the entry cost is more than the present value, the net
present value is negative, which means that the investment would earn
less than the business’s cost-of-capital rate.

## 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.

## Discounting

The process of calculating the present value of a stream of future
cash flows

## discounting

the process of reducing future cash flows to present value amounts

## Discounting

Calculating the present value of a future payment.

## Discounting

The process of finding the present value of a series of future cash flows. discounting is the reverse of compounding.

## Discounting of Accounts Receivable

Short-term financing in which accounts receivable are used as collateral to secure a loan. The lender does not buy the accounts receivable but simply uses them as collateral for the loan. Also called pledging of accounts receivable.

## 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

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

## Dividend

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

## Dividend

A payment made to shareholders that is proportional to the number of shares
owned. It is authorized by the Board of Directors.

## dividend

Periodic cash distribution from the firm to its shareholders.

## Dividend

As the term dividend relates to a corporation's earnings, a dividend is an amount paid per share from a corporation's after tax profits. Depending on the type of share, it may or may not have the right to earn any dividends and corporations may reduce or even suspend dividend payments if they are not doing well. Some dividends are paid in the form of additional shares of the corporation. dividends paid by Canadian corporations qualify for the dividend tax credit and are taxed at lower rates than other income.
As the term dividend relates to a life insurance policy, it means that if that policy is "participating", the policy owner is entitled to participate in an equitable distribution of the surplus earnings of the insurance company which issued the policy. Surpluses arise primarily from three sources:
1) the difference between anticipated and actual operating expenses,
2) the difference between anticipated and actual claims experience, and
3) interest earned on investments over and above the rate required to maintain policy reserves. Having regard to the source of the surplus, the "dividend" so paid can be considered, in part at least, as a refund of part of the premium paid by the policy owner.
Life insurance policy owners of participating policies usually have four and sometimes five dividend options from which to choose:
1) take the dividend in cash,
2) apply the dividend to reduce current premiums,
3) leave the dividends on deposit with the insurance company to accumulate at interest like a savings plan,
4) use the dividends to purchase paid-up whole life insurance to mature at the same time as the original policy,
5) use the dividends to purchase one year term insurance equal to the guaranteed cash value at the end of the policy year, with any portion of the dividend not required for this purpose being applied under one of the other dividend options.
NOTE: It is suggested here that if you have a participating whole life policy and at the time of purchase received a "dividend projection" of incredible future savings, ask for a current projection. Life insurance company's surpluses are not what they used to be.

## Dividend

Unlike dividends which are paid to company shareholders, participating insurance policy dividends are not based on the company's overall profits. Rather, they are determined by grouping policies by type and country of issue and looking at how each class contributes to the company's earnings and surplus.

## 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 growth method

a method of computing the cost
of common stock equity that indicates the rate of return
that common shareholders expect to earn in the form of
dividends on a company’s common stock

## Dividend growth model

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

## Dividend income

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

## 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.

## dividend payout ratio

Computed by dividing cash dividends for the year
by the net income for the year. It’s simply the percent of net income distributed
as cash dividends for the year.

## dividend payout ratio

Percentage of earnings paid out as dividends.

## Dividend policy

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

## Dividend Policy

This policy governs Canada Life's actions regarding distribution of dividends to policyholders. It's goal is to achieve a dividend distribution that is equitable and timely, and which gives full recognition of the need to ensure the ongoing solidity of the company. It also specifies that distribution to individual policyholders must be equitable between dividend classes and policyholder generations, and among policyholders within any class.

## 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 ratio

Cash dividends paid by a business over the most
recent 12 months (called the trailing 12 months) divided by the current
market price per share of the stock. This ratio is reported in the daily
stock trading tables in the Wall Street Journal and other major newspapers.

## Dividend yield (Stocks)

Indicated yield represents annual dividends divided by current stock price.

## Dividends

Amounts paid to the owners of a company that represent a share of the income of the company.

## Dividends

Profits paid out to shareholders by a corporation.

## Dividends per share

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

## 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.

## 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.

## 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.

## economic components model

Abrams’ 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.

## 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.

## ex-dividend date

Date that determines whether a stockholder is entitled to a dividend payment; anyone holding stock before this date is entitled to a dividend.

## 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.

## 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.

## 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.