Example: Assume your required rate of return (ks) for Wendy’s common stock is 10 percent. Suppose your research leads you to believe that Wendy’s Corporation will pay a $0.25 dividend in one year(D1)?

To calculate the intrinsic value of Wendy's stock using the dividend discount model, you can use the formula:

Intrinsic Value = D1 / (ks - g)

Where:
D1 = Expected dividend in one year = $0.25
ks = Required rate of return = 10%
g = Growth rate of dividends

If we assume a growth rate of dividends of 5%, we can plug in the values to calculate the intrinsic value:

Intrinsic Value = $0.25 / (0.10 - 0.05)
Intrinsic Value = $0.25 / 0.05
Intrinsic Value = $5

Therefore, based on the dividend discount model, the intrinsic value of Wendy's stock is $5. If the current market price of Wendy's stock is lower than $5, it may be considered undervalued and a good investment opportunity.

The value of Wendy's common stock using the constant-growth dividend discount model (DDM) is:

$$P_0 = \frac{D_1}{ks - g}$$

Where:

- P0 is the current price of the stock
- D1 is the expected dividend payment in one year
- ks is the required rate of return
- g is the expected constant growth rate of dividends


Given that D1 = $0.25 and ks = 10%, and assuming a constant growth rate of dividends of 5%, the value of Wendy's common stock would be:

$$P_0 = \frac{0.25}{0.10 - 0.05} = $5.00$$