Dividend Discount Model
Originally published: 17/06/2016 13:42
Publication number: ELQ-63157-1
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Dividend Discount Model

A complete dividend discount model that can do stable growth, 2-stage or 3-stage valuation.

This model enables you to make a complete dividend discount model that can do stable growth, 2-stage or 3-stage valuation in the context of a firm having the following assumptions:

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.

Option: You can make this model into a three stage model by answering yes to the question of whether you want me to adjust the inputs in the second half of the high growth
period. If you do, I will adjust the growth rate, the payout ratio and the cost of equity from high-growth levels to stable growth levels gradually.You can also make this a stable growth model by setting the high growth period to zero.

Note: this model is being shared with the authorization of Professor Aswath Damodaran from NYU Stern Business School (www.damodaran.com)

This Best Practice includes
1 Excel Model File

Prof. Aswath Damodaran offers you this Best Practice for free!

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Further information

The objective of this model is to get the following output values for a firm:
- Cost of Equity
- Net Income
- Earnings per Share
- Growth rate in EPS
- Payout Ratio for high growth phase

- Payout Ratio
- Dividends per share
- Cost of Equity
- Cumulative Cost of Equity
- Present Value of dividends up to 10 years

- Price at the end of the growth phase

Estimated value of growth:
- Value of assets in place
- Value of stable growth
- Value of extraordinary growth
- Value of the stock

This is your best choice if you are analyzing financial service firms.

4.7 / 5 (42 votes)

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