Wize University Introduction to Finance Textbook > Equity Valuation
Common Shares (No Growth)
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Zero-Growth Dividend Model
• Generalized model of discounting future dividends.
• Suitable for stable/mature companies and for preferred shares valuation
• Assumes no growth in dividend payments
• Assumes company lives on forever
Formula breakdown:
D = Constant dividend
r = Risk-adjusted effective periodic discount rate (expected return)
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Example: Dividend Discount Model (Zero Growth)
DT Bank pays a $4 dividend to its preferred shareholders. If the required rate of return on this stock is 8%, what is the price today?
Mark Yourself Question
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Practice: Dividend Discount Model (Zero Growth)
Royal Bank of Saudi Arabia’s perpetual preferred stock pays annual dividends of $1.3750 and was originally issued to be priced to yield at 5.5%.
What was the price of the preferred stock at issuance?
If your required rate of return is 8%, what is the reasonable price of the perpetual preferred stock from your perspective?