DCF vs. DDM

Difference Between DCF and DDM

What is DCF and DDM? For those who are unaware of the jargon used by financial experts, acronyms DCF and DDM may seem strange, but ask those who are in the money market and the shareholders of a company and they will tell you the importance of these terms in the stock assessment of a company. All sorts of financial statements of a company are used to arrive at the stock assessment and out of all the different instruments, DDM and DCF are very popular among both investors and investment experts. It helps to have knowledge of these instruments if you are an investor. Let us take a closer look at DDM and DCF.

DCF

Also known as Discounted Cash Flow it is a tool to calculate the estimated present value of a stock of a company based on its projections of future cash flow. This is a very popular tool and investors prefer it as it leads them to think about the future returns on their money. It’s also a good reality check for the real value of the stock of a company. Projections of future cash flows are taken and discarded to arrive at a realistic price value for today.

DDM

This is known as Dividend Discount Model and is similar to DCF in that it also uses projections of future cash flows to arrive at a fair assessment of the present value of the stock of a company. The difference arises in the fact that in this case, the assumptions are in the considerations of dividends paid to investors. This technique is more suitable for large and successful companies that have a track record to pay dividends to its shareholders. In addition to projections of future cash flow, DDM also casts a look to future dividends or growth rate of dividends.

The two instruments to calculate the present value of the stock of a company, DCF is more popular among investors as a vast majority of companies do not pay dividends. DDM is used on a much smaller scale than DCF.

 

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