The Dividend Discount Method (DDM) measures the value of a company's assets by estimating the expected future cash flows to investors, (i.e., dividends) and discounting those future flows by the investors' required rate of return to determine the present value of the future cash stream.
See Valuation Theory.
Entering Data for Dividend Discount Method Accounts:
For Cost of Capital, click Inputs and enter the account values.
The Cost of Capital is the weighted average costs of debt and equity. The rate should be entered as a percentage, not a decimal (5.57% is input at 5.57, not .0557). It is recommended that you use one rate for all periods.
For Long-Term Cost of Capital, click Inputs and enter account values.
The Long-Term Cost of Capital is used to calculate the residual value. The rate should be entered as a percentage, not a decimal.
In Method to Use, select an option from the drop-down list.
When performing a valuation using the Free Cash Flow method, you can select from six different residual value methods:
In Long-Term Return on Book Equity (%), enter a value.
Enter the Long-Term Return on Book Equity which is used to compute the Perpetuity Affordable Dividend.
In Target Leverage Ratio (%), enter a value.
Enter the Target Leverage Ratio (%) when using the Perpetuity, Growth in Perpetuity or Value Growth Duration methods to calculate residual value.
In Perpetuity Growth Rate (%), enter a value.
Enter the Perpetuity Growth Rate (%) when using the Growth in Perpetuity Method to calculate residual value.
In Value Growth Duration (years), enter a value.
Enter the Value Growth Duration (years) when using the Value Growth Duration Method to calculate residual value.
For Market-to-Book Ratio, click Inputs and enter the account values.
Enter the Market-to-Book Ratio which is used in the calculation of Market-to-Book Equity Residual Value.
For Price / Earnings Ratio, click Inputs and enter the account values.
Enter the Price/Earnings Equity Ratio which is used in the calculation of Price/Earnings Equity Residual Value.
For Normalized Earnings Adjustment, click Inputs and enter the account values.
You can use this item to change or "normalize," for valuation purposes of the period-by-period values for Income Available for Common Shareholders that you consider to be abnormally high or low due to prevailing industry or economic conditions in that year which are not expected to continue.
If you enter adjustments for periods, the amount is added to Income Available for Common Shareholders used in calculating the Price/Earnings Equity Residual Value for valuation. It will not change Income Available for Common Shareholders as it appears on the Income Statement.
For Liquidation Value, click Inputs and enter the account values.
This item represents your estimate, in future value currency, of what the "price tag" of the business is in each year of the forecast period, based on your expectations of prevailing conditions in that period. You must incorporate the costs of liquidation, including such items as transaction cost and recapture tax in this value.