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In financial economics, the dividend discount model (DDM) is a method of valuing the price of a company's capital stock or business value based on the assertion that intrinsic value is determined by the sum of future cash flows from dividend payments to shareholders, discounted back to their present value.
The theory is based on the hypothesis that management "manipulates" capital structure such that earnings per share (EPS) are maximized. As a corollary, the CSS theory is seen to provide management with (some) guidance on dividend policy - more directly in fact than other approaches, such as the Walter model and the Gordon model.
The primary difference between SPM and the Walter model is the substitution of earnings and growth in the equation. Consequently, any variable which may influence a company's constant growth rate such as inflation, external financing, and changing industry dynamics can be considered using SPM in addition to growth caused by the reinvestment of ...
A generalized version of the Walter model (1956), [6] SPM considers the effects of dividends, earnings growth, as well as the risk profile of a firm on a stock's value. Derived from the compound interest formula using the present value of a perpetuity equation, SPM is an alternative to the Gordon Growth Model. The variables are:
Under a "Residual dividend policy" - i.e. as contrasted with a "smoothed" payout policy - the firm will use retained profits to finance capital investments if cheaper than the same via equity financing; see again Pecking order theory. Similarly, under the Walter model, dividends are paid only if capital retained will earn a higher return than ...
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Trade-off theory of capital structure; Merton model; Tax shield; Dividend policy. Corporate finance § Dividend policy; Walter model; Gordon model; Lintner model; Residuals theory; Signaling hypothesis; Clientele effect; Dividend puzzle; Treasury stock § Buying back shares; Dividend tax; Capital budgeting (valuation) Corporate finance ...
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