Which model is used to evaluate the value of a share of common stock based on future dividends?

The Dividend Discount Model (DDM) is the appropriate choice for evaluating the value of a share of common stock based on future dividends. This model operates on the principle that a stock's price is determined by the present value of its expected future dividends.

In essence, the DDM calculates the present value of anticipated dividend payments, factoring in the time value of money. It assumes that dividends will grow at a certain rate over time and discounts these expected future dividends back to their present value. This approach is particularly useful for investors who focus on companies that regularly pay dividends, allowing them to assess whether the stock is fairly valued compared to the present worth of those dividends.

The other models listed serve different purposes. For instance, the Capital Asset Pricing Model assesses the expected return of an asset based on its systematic risk relative to the market, while the Black-Scholes Model is primarily used for pricing options rather than stocks. The Market Capitalization Model, on the other hand, refers more broadly to the total market value of a company’s outstanding shares, not the intrinsic value based on future dividends.