What does the Dividend Discount Model (DDM) estimate?

The Dividend Discount Model (DDM) is a valuation method used to estimate the intrinsic value of a stock based primarily on the expected future dividends that the stock will pay to shareholders. The model operates under the premise that the current value of a stock is equal to the sum of all future dividends, discounted back to their present value.

The intrinsic value calculated through DDM provides investors with a benchmark to determine whether a stock is undervalued or overvalued based on its current market price. By focusing specifically on dividends, the DDM assumes that dividends represent the return that investors earn for holding the stock, making it a key tool in stock valuation for dividend-paying companies.

In contrast, the other options focus on different aspects of finance and stock analysis. For example, estimating future stock prices involves market predictions that are often speculative and influenced by numerous factors such as market conditions, economic trends, and investor sentiment. Evaluating the risk associated with a stock entails considering volatility, beta, and other risk factors, which is not the primary focus of the DDM. Market capitalization is determined by the total shares outstanding multiplied by the stock's current price, which quantifies a company's size but does not concern itself with estimating value through dividends. Thus, the