Chapter: 10 Stock Valuation

Section: 5 Zero Growth Dividend Discount Model

We can apply the same principle to the valuation of stocks with the only difference that instead of discounting coupons, we would discount dividends and there would be no par value and a limited maturity period. Assume that a stock pays an annual dividend of SR 2 that is expected to remain unchanged in the foreseeable future. If, for the sake of simplicity, we assume that the required rate of return on a stock is 12% (we will discuss the derivation of the required rate of return on a stock in a later section), the stock can be valued as:

Po =




Po =




= SR16.67


Po = Fair market value/price of the stock
Do = Latest dividend paid by the company
Ks = Cost of Equity (Required Rate of Return on the stock)