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Three-Stage Dividend Discount Model
  • Three-Stage Dividend Discount Model
Originally published: 22/06/2016 12:48
Publication number: ELQ-82863-1
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Three-Stage Dividend Discount Model

Value the equity in a firm with three stages of growth

Prof. Aswath Damodaranby Prof. Aswath Damodaran
Professor at NYU Stern School of BusinessFollow 1,092
NYU Stern School of Businesswith NYU Stern School of Business
An Education in PossibleFollow 62
23 reviews3,956 views|Start the discussion!|Bookmark download for free
growthfinancevaluationequitystable growthtransitiondividend discount modelthree-stageinitial period
Description
This model is designed to value the equity in a firm with three stages of growth - an initial period of high growth, a transition period of declining growth and a final period of stable growth.

The user should enter the following inputs:
1. Length of each growth phase
2. Growth rate in each growth phase
3. Dividend payout ratios in each growth phase.
4. Costs of Equity in each growth phase

Note: this model is being shared with the authorization of Professor Aswath Damodaran from NYU Stern Business School

This Best Practice includes
1 Excel Model File

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Further information

Outputs:

- 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.

Assumptions:
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.


4.8 / 5 (23 votes)

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