The dividend discount model (DDM) can be used to value preferred stock by simply using a growth rate of zero in the DDM model.

Question

Quizplus · Accepted Answer

The DDM model assumes that the future dividend payments can be estimated and discounted at an appropriate rate to determine the present value of the stock. For preferred stock, the dividends are typically fixed and paid at a predetermined rate. Therefore, the model can be applied by assuming a zero growth rate because the dividend payments are not expected to increase over time.

The Dividend Discount Model (DDM) Can Be Used to Value