Multi-Stage Dividend Discount Models
Unlike the Multiple Holding Period DDM previously described, the Multi-Stage Dividend Discount Model allows for multiple growth rates in calculating a stock value.
The allowance of multiple growth rates is more realistic, companies commonly experience a growth phase, a transitional phase (as new competition enters the market driving down returns), and a mature phase.
Naturally this implies that a Three Stage DDM could be tested; see the official curriculum for a detailed example.
The Multi-Stage DDM presents the analyst an opportunity to account for the different growth rates that a company may experience in these different growth phases.
The Two Stage High Growth followed by Stable Growth DDM:
The formula for a High Growth followed by Stable Growth Two Stage DDM may look daunting at first, but its components are logical and build upon the foundation of the basic DDM principles.
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- Equity Analysis Part 2 - Introduction
- Porter’s Five Competitive Forces
- Industry Analysis
- Supply and Demand Analysis
- Financial Projections in Emerging Markets
- Cost of Capital in Emerging Markets
- Cash Flows: Dividends vs. Free Cash Flows vs. Residual Income
- Dividend Discount Model (DDM)
- Gordon Growth Model (GGM)
- Present Value of Growth Opportunities (PVGO)
- GGM, Leading P/E Ratio, and Trailing P/E Ratio
- Multi-Stage Dividend Discount Models
- H-Model for Valuing Growth
- Sustainable Growth Rate