Three-Stage Dividend Discount Model
THREESTAGEDIVIDENDDISCOUNTMODEL
Thismodelisdesignedtovaluetheequityinafirmwiththreestagesof
growthaninitialperiodofhighgrowth,atransitionperiodofdeclining
growthandafinalperiodofstablegrowth.
Assumptions
1.Thefirmisassumedtobeinanextraordinarygrowthphasecurrently.
2.Thisextraordinarygrowthisexpectedtolastforaninitialperiodthathastobespecified.
3.Thegrowthratedeclineslinearlyoverthetransitionperiodtoastablegrowthrate.
4.Thefirm'sdividendpayoutratiochangesconsistentlywiththegrowthrate.
Theusershouldenterthefollowinginputs:
1.Lengthofeachgrowthphase
2.Growthrateineachgrowthphase
3.Dividendpayoutratiosineachgrowthphase.
4.CostsofEquityineachgrowthphase
Page
Three-Stage Dividend Discount Model
Inputstothemodel
CurrentEarningspershare= $1.43 (incurrency)
CurrentDividendspershare= $0.56 (incurrency)
Doyouwanttoentercostofequitydirectly? No (YesorNo)
Ifyes,enterthecostofequity= (inpercent)
Ifno,entertheinputstothecostofequity
Betaofthestock= 1.1
Riskfreerate= 7.00% (inpercent)
RiskPremium= 5.50% (inpercent)
GrowthRateduringtheinitialhighgrowthphase
Enterlengthofextraordinarygrowthperiod= 10 (inyears)
Doyouwanttousethehistoricalgrowthrate? Yes (YesorNo)
Ifyes,enterEPSfromfiveyearsago= $0.61 (incurrency)
Doyouhaveanoutsideestimateofgrowth? Yes (YesorNo)
Ifyes,entertheestimatedgrowth: 17.00% (inpercent)
Doyouwanttocalculatethegrowthratefromfundamentals? No (YesorNo)
Ifyes,enterthefollowinginputs:
NetIncomeCurrently= $0.00 Lastyear (incurrency)
BookValueofEquity= $0.00 $0.00 (incurrency)
TaxRateonIncome= 0.00% (inpercent)
Thefollowingwillbetheinputstothefundamentalgrowthformulation:
ROE= NA (inpercent)
Retention= 60.84% (inpercent)
Doyouwanttochangeanyoftheseinputsforthehighgrowthperiod? No
Ifyes,specifythevaluesfortheseinputs(Pleaseenterallvariables)
ROE= NA (inpercent)
Retention= 60.84% (inpercent)
Page
Three-Stage Dividend Discount Model
Doyouwanttochangeanyoftheseinputsforthestablegrowthperiod? Yes
Ifyes,specifythevaluesfortheseinputs
ROE= 20.00% (inpercent)
(inpercent)
Specifyweightstobeassignedtoeachofthesegrowthrates:
HistoricalGrowthRate= 20.00% (inpercent)
Page
Three-Stage Dividend Discount Model
OutsidePredictionofGrowth= 40.00% (inpercent)
FundamentalEstimateofGrowth= 40.00% (inpercent)
GrowthRateduringthetransitionperiod
Enterlengthofthetransitionperiod= 8 (inyears)
Doyouwantthepayoutratiotoadjustgraduallytostablepayout? Yes
Ifno,enterthepayoutratioforthetransitionperiod=
Doyouwantthebetatoadjustgraduallytostablebeta? Yes
Ifno,enterthebetaforthetransitionperiod=
GrowthRateduringthestablephase
Entergrowthrateinstablegrowthperiod? 8.00% (inpercent)
Stablepayoutratiofromfundamentalsis= 60.0% (inpercent)
Doyouwanttochangethispayoutratio? No (YesorNo)
Ifyes,enterthestablepayoutratio= (inpercent)
Willthebetatochangeinthestableperiod? No (YesorNo)
Ifyes,enterthebetaforstableperiod=
Outputfromtheprogram
InitialHighGrowthPhase
CostofEquity= 13.05%
Page
Three-Stage Dividend Discount Model
CurrentEarningspershare= $1.43
GrowthRateinEarningspershareInitialHighGrowthphase
GrowthRate Weight
HistoricalGrowth= 18.58% 20.00%
OutsideEstimates= 17.00% 40.00%
FundamentalGrowth= 0.00% 40.00%
WeightedAverage 10.52%
PayoutRatioforhighgrowthphase= 39.16%
Page
Three-Stage Dividend Discount Model
Thedividendsforthehighgrowthphaseareshownbelow(upto10years)
Year 1 2 3 4 5
Earnings $1.58 $1.75 $1.93 $2.13 $2.36
Dividends $0.62 $0.68 $0.76 $0.84 $0.92
PresentValue $0.55 $0.54 $0.52 $0.51 $0.50
Transitionperiod(uptotenyears)
Year 11 12 13 14 15
GrowthRate 10.20% 9.89% 9.57% 9.26% 8.94%
PayoutRatio 41.77% 44.37% 46.98% 49.58% 52.19%
Earnings $4.28 $4.71 $5.16 $5.63 $6.14
Dividends $1.79 $2.09 $2.42 $2.79 $3.20
Beta 1.1 1.1 1.1 1.1 1.1
CostofEquity 13.05% 13.05% 13.05% 13.05% 13.05%
PresentValue $0.46 $0.48 $0.49 $0.50 $0.51
StableGrowthPhase
GrowthRateinStablePhase= 8.00%
PayoutRatioinStablePhase= 60.00%
CostofEquityinStablePhase= 13.05%
Priceattheendofgrowthphase= $100.09
PresentValueofdividendsinhighgrowthphase= $4.95
PresentValueofdividendsintransitionphase= $3.99
PresentValueofTerminalPrice= $11.00
Valueofthestock= $19.95
Page
Three-Stage Dividend Discount Model
NTMODEL
Page
Three-Stage Dividend Discount Model
(YesorNo)
Page
Three-Stage Dividend Discount Model
(YesorNo)
Page
Three-Stage Dividend Discount Model
(YesorNo)
(inpercent)
(YesorNo)
Page
Three-Stage Dividend Discount Model
6 7 8 9 10
$2.61 $2.88 $3.18 $3.52 $3.89
$1.02 $1.13 $1.25 $1.38 $1.52
$0.49 $0.48 $0.47 $0.46 $0.45
16 17 18
8.63% 8.31% 8.00% 0.00% 0.00%
54.79% 57.40% 60.00%
$6.67 $7.22 $7.80
$3.65 $4.15 $4.68
1.1 1.1 1.1
13.05% 13.05% 13.05% 0.00% 0.00%
$0.51 $0.52 $0.51
Page
