Which one of the following best defines the Dividend Discount Model (DDM)?

• A. A model that calculates the value of a bond based on its coupon payments and maturity value.
• B. A method that values a stock by estimating the present value of all expected future dividends.
• C. A method that values securities based on their market price fluctuations over time.
• D. A technique for determining the intrinsic value of a stock by analyzing its earnings per share.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the Dividend Discount Model (DDM). The DDM is a financial model used to value a stock by estimating the present value of all expected future dividends. It assumes that dividends are the primary source of value for a stock.
2. Step 2: Recognize the key components of the DDM. These include the expected future dividends, the discount rate (which reflects the required rate of return), and the time period over which dividends are expected to be received.
3. Step 3: Compare the given options to the definition of DDM. Eliminate options that do not align with the concept of valuing a stock based on the present value of future dividends.
4. Step 4: Focus on the correct answer, which explicitly mentions the valuation of a stock by estimating the present value of all expected future dividends. This matches the definition of the DDM.
5. Step 5: Conclude that the correct answer is: 'A method that values a stock by estimating the present value of all expected future dividends,' as it accurately defines the Dividend Discount Model.