JavaScrpit Function for Stock Valuation with Dividend DIscount Model

One stock pricing technique is to use the dividend discount model which discount all estimated dividends back to present and sum them all up to get the target stock price.

Discounting a dividend to present is the same with the present value of the dividend, where the risk free rate is used.

The dividend discount model assume the stock pays dividends forever. There are variations of assumption for calculating the stock price based on dividend discount model:

  • The risk free rate is constant.
  • The risk free rate following a normal distribution.
  • The stock pays constant dividends.
  • The stock pays increasing(decreasing) dividends with a constant rate.
  • The stock pays differest dividends with rates that follow a normal distribution.

Formula of Dividend Discount Model With A Constant Risk Free Rate and A Constant Dividend Changing Rate

With a stock paying constant dividends, one can just put 0 into d in the above formula.

JavaScrpit Function for Stock Valuation with Dividend DIscount Model

Playground

Assume stocks pay quarterly dividends.
First Divided C: $
Divided Changing Rate: %
Quarterly Interest Rate: %
The stock price is: $0
function getStockPriceWtihDDM(dividend,dividendChangingRate,quarterlyRiskFreeRate){
  	 return dividend/(quarterlyRiskFreeRate - dividendChangingRate);
};
Note that the dividends can not increase faster than the interest rate, because the stock price will be infinity based on the dividend discount model, because if the dividends increase with a rate that is highter than the interest rate, investors can just borrow money and buy the stock which will push the stock price up indefinitely.

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