Dividend discount model

A dividend discount model discounts what shareholders actually receive rather than what the business generates. Because the cash flow is already a shareholder claim, the discount rate is the cost of equity and the output is equity value with no enterprise value step and no net debt bridge.

For an industrial company it is a poor tool, because the dividend is a policy choice by the board rather than a property of the business. Two identical companies with different payout policies would be valued differently, which is the wrong answer.

It becomes the standard tool where a company cannot be separated from its financing. A bank funds itself with deposits and wholesale borrowing, so debt is an input to the business rather than a capital structure decision layered on top of it. There is no meaningful unlevered bank and no net debt figure to bridge with, so valuation moves to the equity side.

For a bank the distributable cash flow is also constrained rather than discretionary, since capital requirements set how much can be paid out. That makes the forecast a capital model as much as a profit model: the dividend is whatever earnings exceed the capital the balance sheet must retain to keep growing. The residual income approach is the common alternative and has a practical advantage, since competition erodes excess returns and the terminal value carries less of the total.