Building Modular Dividend Discount Models Using a 'Super Annuity Formula'

23 Pages Posted: 31 Jul 2020

See all articles by Timothy Falcon Crack

Timothy Falcon Crack

University of Otago - Department of Accountancy and Finance

Helen Roberts

University of Otago - Department of Accountancy and Finance

Date Written: March 15, 2018

Abstract

The dramatic increase in the importance of U.S. dividends since 2001 means that financial analysts may soon demand access to updated dividend discount models (DDMs). To address this need, we introduce a new “super annuity formula” that can be used in the modular construction of multiple-stage level-growth DDMs. We also use the super annuity formula to approximate a three-stage transitional-growth DDM very accurately. We show that these advanced DDMs are relatively robust to the input assumptions. Going forward, every financial analyst should have knowledge of and access to these updated DDMs, so as to capitalize on the growing importance of dividends.

Keywords: dividend discount models, valuation, annuities

JEL Classification: G12, G32, G35

Suggested Citation

Crack, Timothy Falcon and Roberts, Helen, Building Modular Dividend Discount Models Using a 'Super Annuity Formula' (March 15, 2018). Available at SSRN: https://ssrn.com/abstract=3643656 or http://dx.doi.org/10.2139/ssrn.3643656

Timothy Falcon Crack (Contact Author)

University of Otago - Department of Accountancy and Finance ( email )

Dunedin
New Zealand

Helen Roberts

University of Otago - Department of Accountancy and Finance ( email )

PO Box 56
Dunedin, 9054
New Zealand
6434798072 (Phone)
6434798171 (Fax)

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