How to Calculate Expected Share Price

by C. Taylor

If you were investing in stocks, it would be immeasurably useful to predict the stock's price in the future. Although no formula can give you an exact figure, the Dividend Discount Model (DDM), which is sometimes called the Gordon Model, can give you an expected share price. The most elementary version of the DDM predicts what a stock should be selling at now, but with a little tweaking, you can use the DDM to calculate expected share prices in a later year.

Talk to your investment broker and ask for the current dividend payment, expected dividend growth and realistic stock growth percentage. As an example, your broker might tell you the stock offers a $3 annual dividend per share, which is expected to increase by 10 percent each year. He may also tell you the overall expected annual return is 16 percent for the stock.

Add one to the expected dividend growth rate and raise this to the nth power, where "n" is the number of years in the future for which you wish to calculate the expected share price. In the example, if you wish to calculate the expected share price in the third year, you would raise 1.10 to the power of 3 to derive a dividend growth factor of 1.331.

Multiply this growth factor by the current dividend payment. Effectively, this portion of the calculation predicts the future dividend payment. In the example, you would multiply 1.331 times $3 to derive a third-year dividend payment of $3.99.

Subtract the expected dividend growth rate from the expected stock growth rate. In the example, 0.16 minus 0.10 gives you a difference of 0.06.

Divide this figure into the expected third-year dividend payment. This gives you the expected share price in the same year. In the example, you would divide $3.99 by 0.06 to derive an expected third-year share price of $66.50.