🔑 Core Terms from Lecture 10

Question 1

🧮 Dividend Discount Model (DDM)

Answer 1

A method that values a stock by the present value of expected dividends.

➡️ Best for: Mature, stable firms that regularly pay dividends
➡️ Doesn’t work well for: startups or firms that don’t pay dividends

Question 2

🧮 Gordon Growth Model (GGM)

Answer 2

A version of DDM that assumes constant dividend growth.

✅ Condition: Must have k > g to be valid

Question 3

📈 Dividend Growth Rate (g)

Answer 3

How fast dividends are expected to grow each year.

Question 4

💸 Free Cash Flow to Equity (FCFE)

Answer 4

Cash left over for shareholders after reinvestment and debt payments.

✅ Use when:

Firm doesn’t pay consistent dividends

You want to model actual cash going to shareholders

Question 5

🧾 Equity Reinvestment

Answer 5

How much the firm reinvests from profits, adjusted for capital structure.

Question 6

🧠 Retention Ratio (b)

Answer 6

% of earnings not paid out as dividends

Question 7

📊 Cost of Equity (k)

Answer 7

The return shareholders demand for holding the stock.