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Two-Stage Dividend Discount Model
  • Two-Stage Dividend Discount Model
  • Two-Stage Dividend Discount Model
Originally published: 28/06/2016 09:17
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

Prof. Aswath Damodaranby Prof. Aswath Damodaran
Professor at NYU Stern School of BusinessFollow 1,091
NYU Stern School of Businesswith NYU Stern School of Business
An Education in PossibleFollow 62
12 reviews2,073 views|Start the discussion!|Bookmark download for free
financialfinancedividendequitytwo-stage growth
Description
This model is designed to value the equity in a firm with two stages of growth: an initial period of higher growth, and a subsequent period of stable growth.

The user should enter the following inputs:
1. Length of high growth period
2. Expected growth rate in earnings during the high growth period.
3. Dividend payout ratio during the high growth period.
4. Expected growth rate in earnings during the stable growth period.
5. Expected payout ratio during the stable growth period.
6. Current Earnings per share
7. Inputs for the Cost of Equity

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
- 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.


4.6 / 5 (12 votes)

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