Publication number: ELQ-32723-1
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Two-Stage Dividend Discount Model
A dividend discount model for firms with two stages of growth
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- Cost of Equity
- Current Earnings per Share
- Growth Rate in Earnings per Share
- Payout ratio for high 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 Terminal Price
- Value of the stock
- Value of assets in place
- Value of stable growth
- Value of extraordinary growth
- Value of the stock
Best suited for firms paying residual cash in dividends, while having two-stage growth
The following assumptions apply:
1. The firm is expected to grow at a higher growth rate in the first period.
2. The growth rate will drop at the end of the first period to the stable growth rate.
3. The dividend payout ratio is consistent with the expected growth rate.
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