Dividend Discount Model
Deriving the Dividend Discount Model in the Intermediate Microeconomics Class
Stephen Norman Jonathan Schlaudraff Karianne White Douglas Wills*
May 2012
Abstract This paper shows that the dividend discount model can be derived using the basic intertemporal consumption model that is introduced in a typical intermediate microeconomic course. This result will be of use to instructors who teach microeconomics to finance students in that it demonstrates the value of utility maximization in obtaining one of the first stock valuation models used in basic finance. Keywords: Dividend Discount Model, Intertemporal Consumption, Microeconomics Instruction, Finance Instruction JEL Codes: A22, D90, G12
*Stephen Norman: Assistant Professor, University of Washington - Tacoma, 1900 Commerce Street, Tacoma, WA 98402, Phone: 253-692-4827, Fax: 253-692-4523, Email: normanse@uw.edu. Jonathan Schlaudraff: Student, University of Washington - Tacoma, 1900 Commerce Street, Tacoma, WA 98402, Phone: 253-692-4827, Fax: 253-692-4523, Email: jonathanschlaudraff@gmail.com. Karianne White: Student, University of Washington - Tacoma, 1900 Commerce Street, Tacoma, WA 98402, Phone: 253-692-4827, Fax: 253-692-4523, Email: karimarie84@yahoo.com. Douglas Wills (Corresponding Author): Associate Professor, University of Washington - Tacoma, 1900 Commerce Street, Tacoma, WA 98402, Phone: 253692-5626, Fax: 253-692-4523, Email: dtwills@uw.edu.
1
With the rise in business school enrollments, instructors of intermediate microeconomic theory often find that many of their students are business majors studying finance. As such, it is incumbent upon economists to demonstrate that the core intermediate class is relevant for the understanding of financial theory. This paper argues that financial theory is invariably connected to fundamental economic theory with the link between the two provided by a slight change in terminology and a small addition to the intertemporal consumption model. More
Stephen Norman Jonathan Schlaudraff Karianne White Douglas Wills*
May 2012
Abstract This paper shows that the dividend discount model can be derived using the basic intertemporal consumption model that is introduced in a typical intermediate microeconomic course. This result will be of use to instructors who teach microeconomics to finance students in that it demonstrates the value of utility maximization in obtaining one of the first stock valuation models used in basic finance. Keywords: Dividend Discount Model, Intertemporal Consumption, Microeconomics Instruction, Finance Instruction JEL Codes: A22, D90, G12
*Stephen Norman: Assistant Professor, University of Washington - Tacoma, 1900 Commerce Street, Tacoma, WA 98402, Phone: 253-692-4827, Fax: 253-692-4523, Email: normanse@uw.edu. Jonathan Schlaudraff: Student, University of Washington - Tacoma, 1900 Commerce Street, Tacoma, WA 98402, Phone: 253-692-4827, Fax: 253-692-4523, Email: jonathanschlaudraff@gmail.com. Karianne White: Student, University of Washington - Tacoma, 1900 Commerce Street, Tacoma, WA 98402, Phone: 253-692-4827, Fax: 253-692-4523, Email: karimarie84@yahoo.com. Douglas Wills (Corresponding Author): Associate Professor, University of Washington - Tacoma, 1900 Commerce Street, Tacoma, WA 98402, Phone: 253692-5626, Fax: 253-692-4523, Email: dtwills@uw.edu.
1
With the rise in business school enrollments, instructors of intermediate microeconomic theory often find that many of their students are business majors studying finance. As such, it is incumbent upon economists to demonstrate that the core intermediate class is relevant for the understanding of financial theory. This paper argues that financial theory is invariably connected to fundamental economic theory with the link between the two provided by a slight change in terminology and a small addition to the intertemporal consumption model. More