Investments Formula #2

Question 1

What is this formula?
V=D1/r-g

Answer 1

Dividend discount model formula (DDM) or Constant Growth Model

Question 2

When do you use this formula?

Answer 2

When the question asked to solve for the intrinsic value of the stock (to compare the market price to see if it’s worth buying) in the context of a rising dividend

Question 3

You what must they give you to solve this?

Answer 3

The dividend and dividend growth rate

Question 4

Do you use decimals or whole numbers to represent percentages?

Answer 4

Decimals 8% should be .08

Question 5

What if no dividend is given?

Answer 5

Use P/E x EPS

Question 6

What does V represent?

Answer 6

Intrinsic Value of the stock (what it is worth) to compare to its market value (what it’s selling for). Or: Is it a good deal?

Question 7

What does D1 represent?

Answer 7

Next year’s dividend

Question 8

What is another way to write next year‘s dividend?

Answer 8

Do(1+g)

Question 9

What does “r” represent?

Answer 9

Investors required rate of return (you may need to solve for by using the SML formula)

Question 10

What does “g“ represent?

Answer 10

Dividend growth rate