DDM vs DCF
What is DCF and DDM? For those who are not aware of the jargon used by financial experts, the acronyms DCF and DDM may look outlandish, but ask those who are into money market and the shareholders of a company and they will tell you the importance of these terms in valuation of the stock of a company. All sorts of financial statements of a company are used to arrive at the stock valuation and out of various tools; DDM and DCF are very popular among both investors and investment experts. It helps to have knowledge about these tools if you happen to be an investor. Let us take a closer look at DDM and DCF.
Also known as Discounted Cash Flow, it is one tool to calculate an estimate of the present value of a stock of a company based upon its future cash flow projections. This is a very popular tool and investors like it as it makes them think about future returns on their money. It is also a good reality check of the real value of the stock of a company. Future cash flow projections are taken and discounted to arrive at a realistic price value for today.
This is known as Dividend Discount Model and is similar to DCF in the sense that it too uses future cash flow projections to arrive at a fair assessment of the present value of the stock of a company. The difference arises in the fact that in this case, assumptions take into considerations of dividends paid to the investors. This technique is more suitable for big and successful companies that have a track record of paying dividends to its shareholders. In addition to future cash flow projections, DDM also takes a look at future dividends or growth rate of dividends.
Out of the two tools to calculate the present value of the stock of a company, DCF is more popular among investors as a vast majority of companies do not pay dividends. As such DDM is used on a much smaller scale than DCF.
Discounted Cash Flow (DCF) vs Dividend Discount Model (DDM)
• There are statistical models available to make a fair assessment of the present value of the stock of a company and out of them DDM and DCF are very popular
• DCF takes into account future cash flow projections of a company and arrives at the present value discounting the future rates.
• DDM is similar to DCF in the sense that it too makes use of these future cash flow projections but also takes into account future dividend rates.