Two-Stage Dividend Discount Model

Two-Stage Dividend Discount Model

This model is designed to value the equity in a firm, with two stages of growt
period of higher growth and a subsequent period of stable growth

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.

The user has to define 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

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Inputs to the model

Current Earnings per share = $5.49 (in currency)
Current Dividends per share =
$2.31 (in currency)

Enter length of extraordinary growth period =

5 (in years)

Do you want to enter cost of equity directly?No (Yes or No)

If yes, enter the cost of equity = (in percent)
If no, enter the inputs to the cost of equity
Beta of the stock = 0.95
Riskfree rate= 7.00% (in percent)
Risk Premium= 5.50% (in percent)

Do you want to use the historical growth rate?

Yes (Yes or No)
If yes, enter EPS from five years ago = $1.62 (in currency)

Do you have an outside estimate of growth Y

? es (Yes or No)
If yes, enter the estimated growth: 17.00% (in percent)

Do you want to calculate the growth rate from fundamentals?

Yes (Yes or No)
If yes, enter the following inputs:
Net Income Currently = $2,122.00 Last year (in currency)
Book Value of Equity = $6,237.00 $6,155.00 (in currency)
Tax Rate on Income= 40.00% (in percent)
The following will be the inputs to the fundamental growth formulation:
ROE = 34.48% (in percent)
Retention = 58.00% (in percent)
Do you want to change any of these inputs for the high growth period?Yes
If yes, specify the values for these inputs (Please enter all variables)
ROE = 34.48% (in percent)
Retention = 58.00% (in percent)
Do you want to change any of these inputs for the stable growth period?
Yes

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If yes, specify the values for these inputs

ROE = 34.48% (in percent)

Specify weights to be assigned to each of these growth rates:

Historical Growth Rate = 40.00% (in percent)
Outside Prediction of Growth = 40.00% (in percent)
Fundamental Estimate of Growth = 20.00% (in percent)

Enter growth rate in stable growth period?8.00% (in percent)

Stable payout ratio from fundamentals is =

76.80% (in percent)
Do you want to change this payout ratio? No (Yes or No)
If yes, enter the stable payout ratio= (in percent)

Will the beta to change in the stable period?No (Yes or No)

If yes, enter the beta for stable period =

Before reviewing the output, check to see if any warnings appear on the next page.
Warnings

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Output from the program

Cost of Equity = 12.23%

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Current Earnings per share= $5.49

Growth Rate in Earnings per share

Growth Rate Weight
Historical Growth = 27.65% 40.00%
Outside Estimates = 17.00% 40.00%
Fundamental Growth = 20.00% 20.00%
Weighted Average 21.86%

Payout Ratio for high growth phase= 42.00%

The dividends for the high growth phase are shown below (upto 10 years)
1 2 3 4 5
Dividends $2.81 $3.42 $4.17 $5.08 $6.20

Growth Rate in Stable Phase = 8.00%

Payout Ratio in Stable Phase = 76.80%
Cost of Equity in Stable Phase = 12.23%
Price at the end of growth phase = $289.59

Present Value of dividends in high growth phase$14.86

=
Present Value of Terminal Price = $162.68
Value of the stock = $177.54

Estimating the value of growth

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Value of assets in place = $18.86

Value of stable growth = $40.08
Value of extraordinary growth = $118.60
Value of the stock = $177.54

Growth RateExtraordinary Growth period Value

: First phase Growth 0 $48.83
11.86% $58.50 1 $60.59
12.86% $63.63 2 $73.35
13.86% $68.95 3 $87.21
14.86% $74.45 4 $102.26
15.86% $80.14 5 $118.60
16.86% $86.03 6 $136.34
17.86% $92.12 7 $155.61
18.86% $98.42 8 $176.53
19.86% $104.92 9 $199.24
20.86% $111.65 10 $223.91
21.86% $118.60
22.86% $125.77
23.86% $133.18
24.86% $140.83
25.86% $148.72
26.86% $156.87
27.86% $165.27

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 Two-Stage Dividend Discount Model

Model

wo stages of growth, an initial

d of stable growth.

e growth rate.

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 Two-Stage Dividend Discount Model

(Yes or No)

(Yes or No)

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 Two-Stage Dividend Discount Model

the next page.

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Two-Stage Dividend Discount Model

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Two-Stage Dividend Discount Model

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