Three-Stage Dividend Discount Model
Value the equity in a firm with three stages of growth
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- Cost of Equity
- Current Earnings per share
- Growth Rate in Earnings per share - Initial High - - Growth phase
- Historical Growth
- Outside Estimates
- Fundamental Growth
- Weighted Average
- Payout Ratio for high growth phase
- Stable Growth Phase
- Growth Rate in Stable Phase
- Payout Ratio in Stable Phase
- Cost of Equity in Stable Phase
- Price at the end of growth phase
- Present Value of dividends in high growth phase
- Present Value of dividends in transition phase
- Present Value of Terminal Price
- Value of the stock
Best suited for firms paying residual cash in dividends, while having high growth.
1. The firm is assumed to be in an extraordinary growth phase currently.
2. This extraordinary growth is expected to last for an initial period that has to be specified.
3. The growth rate declines linearly over the transition period to a stable growth rate.
4. The firm's dividend payout ratio changes consistently with the growth rate.
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