The previous section provided a historical perspective to the development of the dividend model.  In practice the dividend model is applied in different ways.  We can classifiy these different ways in terms of how the numerator (i.e., expected dividends) and the denominator (discount rate) are estimated. 

The Valuation Tutor software provides you with a lot of flexibility for how you can apply these different forms of the dividend model.  In particular, it lets you apply it in the following ways:

 In the above screen beow the Dividend Model are the following sub categories:

Discount Rates:  Two methods for estimating discounting rates are provided --- CAPM and MCPM.  CAPM stands for the Capital Asset Pricing Model and it discussed in every standard finance textbook.  The discount rate in this model depends upon three variables -- a stock's beta (i.e., how the stock's returns vary with the general market), the current yield to maturity on a longer maturity Treasury instrument, and the premium you expected to get from the stock market as a whole over the yield to maturity from the Treasury instrument.

A second relative technique the MCPM is also provided.  This technique starts with the yield to maturity associated with a stock's credit rating (e.g., AAA, AA, A, BBB etc.,) and adjusts this for the additional premium required using a put option to insure that a stock's return does not fall below the return from it's debt's risk class.

The remaining selections relate to how the numerator or expected dividend is estimated.

The next section provides operational details for the different techniques starting with the simple form which uses the analyst forecast of next year's dividend..  These variations affect how we compute dividends and how we calculate growth rates.  In the simple model, you “know” the value to put in.  In the other variations, the values are imputed from other variables.  All the variations are repeated with the two stage model.  Valuation Tutor makes it easy for you to work across all these variations, learn the inputs required, and begin to understand the relationship between items that appear in the financial statements and the intrinsic value.