Valuing Stocks Using Dividends: The Dividend Discount Model

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Valuing Stocks Using Dividends: The Dividend Discount Model
Mardhiah Baharin, Manager, Malaysia

The value of a stock in its simplest sense is the present value of the cash flow expected to be provided by that stock (plus any increase of the share price).
The dividend discount model, a formula used widely in stock valuation, uses the future value of dividends to determine the current value of a stock. The formula to produces such valuation says that Price (P) is equal to the Dividend (D) divided by the discount rate (k) less the growth rate (g) of that divided.
The formula of the dividend discount equation can be written as P = D / (k-g)
It's clear that when the dividend (D) is high, the Price (P) value will also be high.
What does this mean for high tech based companies, they would then not obtain a high P value...
Someone told me that due to the fact such companies invest a lot back in innovation, so they can't issue high share value. Any responses?



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