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Pascal PIERRE edited section_textit_DDM_textit_RIM__.tex
almost 8 years ago
Commit id: eadaf391c30f356b4f0aa2d21ef214b47951c355
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We start off firslty by reminding the general model for valuing assets. A well know accounting identity expresses the relation between the value of an asset, the income stream it generates and to which the holder of the asset is entitled ($C_{1}$,$C_{2}$, . . . $C_{n}$) and an endogeneous return $R$
\begin{equation}
V_{t}=\displaystyle\sum_{i=1}^{K}\frac{C_{t+i}}{(1+R)^i}+V_{t+K} V_{t}=\displaystyle\sum_{i=1}^{K}\frac{C_{t+i}}{(1+R)^i}+\frac{V_{t+K}}{(1+R)^K}
\end{equation}
In other words, $R$ is what you earn if you pay $V_{0}$, receive $C_{1}$,$C_{2}$, . . . $C_{K}$ and sell the asset at
$V_{K}$. $V_{t+K}$. The value of the asset when you sell it is the terminal value of the asset. This basic principle is at the root of many equity valuation models; the \textit{DDM} is the exact translation of this accounting principle where dividends are the revenues a shareholder is entitled to.
\subsection{The \textit{DDM}}