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

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Inputstothemodel

CurrentEarningspershare= $1.43 (incurrency)

CurrentDividendspershare= $0.56 (incurrency)

Doyouwanttoentercostofequitydirectly? No (YesorNo)

Ifyes,enterthecostofequity= (inpercent)

Ifno,entertheinputstothecostofequity
Betaofthestock= 1.1

Riskfreerate= 7.00% (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)

Ifyes,specifythevaluesfortheseinputs(Pleaseenterallvariables)
ROE= NA (inpercent)

Retention= 60.84% (inpercent)

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Doyouwanttochangeanyoftheseinputsforthestablegrowthperiod? Yes

Ifyes,specifythevaluesfortheseinputs
ROE= 20.00% (inpercent)
(inpercent)

Specifyweightstobeassignedtoeachofthesegrowthrates:
HistoricalGrowthRate= 20.00% (inpercent)

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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)

Ifyes,enterthestablepayoutratio= (inpercent)

Willthebetatochangeinthestableperiod? No (YesorNo)

Ifyes,enterthebetaforstableperiod=

Outputfromtheprogram

InitialHighGrowthPhase

CostofEquity= 13.05%

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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%

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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

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NTMODEL

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(YesorNo)

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(YesorNo)

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(YesorNo)

(inpercent)

(YesorNo)

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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

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