Three-Stage Dividend Discount Model

THREE-STAGE DIVIDEND DISCOUNT MODEL

This model is designed to value the equity in a firm with three stages of
growth - an initial period of high growth, a transition period of declining
growth and a final period of stable growth.

Assumptions

1. The firm is assumed to be in an extraordinary growth phase currently.

2. This extraordinary growth is expected to last for an initial period that has to be specified.

3. The growth rate declines linearly over the transition period to a stable growth rate.

4. The firm's dividend payout ratio changes consistently with the growth rate.

The user should enter the following inputs:

1. Length of each growth phase

2. Growth rate in each growth phase
3. Dividend payout ratios in each growth phase.
4. Costs of Equity in each growth phase

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 Three-Stage Dividend Discount Model

Inputs to the model

Current Earnings per share = $64.23 (in currency)

Current Dividends per share = $95.00 (in currency)

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 = 0.244

Riskfree rate= 2.97% (in percent)

Risk Premium= 7.17% (in percent)

Growth Rate during the initial high growth phase

Enter length of extraordinary growth period = 5 (in years)

Do you want to use the historical growth rate? Yes (Yes or No)
If yes, enter EPS from five years ago = $58.20 (in currency)

Do you have an outside estimate of growth ? Yes (Yes or No)

If yes, enter the estimated growth: 4.00% (in percent)

Do you want to calculate the growth rate from fundamentals? No (Yes or No)

If yes, enter the following inputs:

Net Income Currently = $0.00 Last year (in currency)

Book Value of Equity = $0.00 $0.00 (in currency)

Tax Rate on Income= 0.00% (in percent)

The following will be the inputs to the fundamental growth formulation:
ROE = NA (in percent)

Retention = -47.91% (in percent)

Do you want to change any of these inputs for the high growth period? No (Yes or No)

If yes, specify the values for these inputs (Please enter all variables)
ROE = NA (in percent)
Retention = -47.91% (in percent)

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 Three-Stage Dividend Discount Model

Do you want to change any of these inputs for the stable growth period? Yes (Yes or No)

If yes, specify the values for these inputs

ROE = 20.00% (in percent)

(in percent)

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

Historical Growth Rate = 14.80% (in percent)

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 Three-Stage Dividend Discount Model

Outside Prediction of Growth = 7.60% (in percent)

Fundamental Estimate of Growth = 7.60% (in percent)

Growth Rate during the transition period

Enter length of the transition period = 8 (in years)

Do you want the payout ratio to adjust gradually to stable payout? Yes (Yes or No)
If no, enter the payout ratio for the transition period = (in percent)

Do you want the beta to adjust gradually to stable beta? Yes (Yes or No)

If no, enter the beta for the transition period =

Growth Rate during the stable phase

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

Stable payout ratio from fundamentals is = 60.0% (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 =

Output from the program

Initial High Growth Phase

Cost of Equity = 4.72%

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 Three-Stage Dividend Discount Model

Current Earnings per share= $64.23

Growth Rate in Earnings per share - Initial High Growth phase

Growth Rate Weight

Historical Growth = 1.99% 14.80%

Outside Estimates = 4.00% 7.60%

Fundamental Growth = 0.00% 7.60%
Weighted Average 0.60%

Payout Ratio for high growth phase= 147.91%

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 Three-Stage Dividend Discount Model

The dividends for the high growth phase are shown below (upto 10 years)

Year 1 2 3 4 5
Earnings $64.61 $65.00 $65.39 $65.78 $66.18

Dividends $95.57 $96.14 $96.72 $97.30 $97.88

Present Value $91.26 $87.67 $84.22 $80.91 $77.72

Transition period (upto ten years)

Year 6 7 8 9 10 11

Growth Rate 1.52% 2.45% 3.37% 4.30% 5.22% 6.15%

Payout Ratio 136.92% 125.93% 114.94% 103.95% 92.96% 81.98%

Earnings $67.18 $68.83 $71.15 $74.21 $78.09 $82.89

Dividends $91.99 $86.68 $81.78 $77.14 $72.59 $67.95

Beta 0.244 0.244 0.244 0.244 0.244 0.244
Cost of Equity 4.72% 4.72% 4.72% 4.72% 4.72% 4.72%

Present Value $69.75 $62.76 $56.55 $50.94 $45.78 $40.92

Stable Growth Phase

Growth Rate in Stable Phase = 8.00%
Payout Ratio in Stable Phase = 60.00%

Cost of Equity in Stable Phase = 4.72%

Price at the end of growth phase = ($1,893.43)

Present Value of dividends in high growth phase = $421.78

Present Value of dividends in transition phase = $394.51

Present Value of Terminal Price = ($1,039.66)

Value of the stock = ($223.37)

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 Three-Stage Dividend Discount Model

MODEL

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Three-Stage Dividend Discount Model

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Three-Stage Dividend Discount Model

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7.07% 8.00% 0.00% 0.00%

70.99% 60.00%

$88.75 $95.86

$63.01 $57.51
0.244 0.244
4.72% 4.72% 0.00% 0.00%

$36.23 $31.58

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 Three-Stage Dividend Discount Model

THREE-STAGE DIVIDEND DISCOUNT MODEL

This model is designed to value the equity in a firm with three stages of
growth - an initial period of high growth, a transition period of declining
growth and a final period of stable growth.

Assumptions

1. The firm is assumed to be in an extraordinary growth phase currently.

2. This extraordinary growth is expected to last for an initial period that has to be specified.

3. The growth rate declines linearly over the transition period to a stable growth rate.

4. The firm's dividend payout ratio changes consistently with the growth rate.

The user should enter the following inputs:

1. Length of each growth phase

2. Growth rate in each growth phase
3. Dividend payout ratios in each growth phase.
4. Costs of Equity in each growth phase

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 Three-Stage Dividend Discount Model

Inputs to the model

Current Earnings per share = $16.49 (in currency)

Current Dividends per share = $3.93 (in currency)

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 = 0.66

Riskfree rate= 2.97% (in percent)

Risk Premium= 5.08% (in percent)

Growth Rate during the initial high growth phase

Enter length of extraordinary growth period = 5 (in years)

Do you want to use the historical growth rate? Yes (Yes or No)
If yes, enter EPS from five years ago = $13.65 (in currency)

Do you have an outside estimate of growth ? Yes (Yes or No)

If yes, enter the estimated growth: 4.00% (in percent)

Do you want to calculate the growth rate from fundamentals? No (Yes or No)

If yes, enter the following inputs:

Net Income Currently = $0.00 Last year (in currency)

Book Value of Equity = $0.00 $0.00 (in currency)

Tax Rate on Income= 0.00% (in percent)

The following will be the inputs to the fundamental growth formulation:
ROE = NA (in percent)

Retention = 76.17% (in percent)

Do you want to change any of these inputs for the high growth period? No (Yes or No)

If yes, specify the values for these inputs (Please enter all variables)
ROE = NA (in percent)
Retention = 76.17% (in percent)

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 Three-Stage Dividend Discount Model

Do you want to change any of these inputs for the stable growth period? Yes (Yes or No)

If yes, specify the values for these inputs

ROE = 20.00% (in percent)

(in percent)

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

Historical Growth Rate = 14.80% (in percent)

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Outside Prediction of Growth = 7.60% (in percent)

Fundamental Estimate of Growth = 7.60% (in percent)

Growth Rate during the transition period

Enter length of the transition period = 8 (in years)

Do you want the payout ratio to adjust gradually to stable payout? Yes (Yes or No)
If no, enter the payout ratio for the transition period = (in percent)

Do you want the beta to adjust gradually to stable beta? Yes (Yes or No)

If no, enter the beta for the transition period =

Growth Rate during the stable phase

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

Stable payout ratio from fundamentals is = 60.0% (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 =

Output from the program

Initial High Growth Phase

Cost of Equity = 6.32%

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Current Earnings per share= $16.49

Growth Rate in Earnings per share - Initial High Growth phase

Growth Rate Weight

Historical Growth = 3.85% 14.80%

Outside Estimates = 4.00% 7.60%

Fundamental Growth = 0.00% 7.60%
Weighted Average 0.87%

Payout Ratio for high growth phase= 23.83%

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The dividends for the high growth phase are shown below (upto 10 years)

Year 1 2 3 4 5
Earnings $16.63 $16.78 $16.93 $17.07 $17.22

Dividends $3.96 $4.00 $4.03 $4.07 $4.10

Present Value $3.73 $3.54 $3.36 $3.18 $3.02

Transition period (upto ten years)

Year 6 7 8 9 10 11

Growth Rate 1.76% 2.66% 3.55% 4.44% 5.33% 6.22%

Payout Ratio 28.35% 32.87% 37.40% 41.92% 46.44% 50.96%

Earnings $17.53 $17.99 $18.63 $19.46 $20.49 $21.77

Dividends $4.97 $5.92 $6.97 $8.16 $9.52 $11.09

Beta 0.66 0.66 0.66 0.66 0.66 0.66
Cost of Equity 6.32% 6.32% 6.32% 6.32% 6.32% 6.32%

Present Value $3.44 $3.85 $4.27 $4.70 $5.16 $5.65

Stable Growth Phase

Growth Rate in Stable Phase = 8.00%
Payout Ratio in Stable Phase = 60.00%

Cost of Equity in Stable Phase = 6.32%

Price at the end of growth phase = ($972.92)

Present Value of dividends in high growth phase = $16.83

Present Value of dividends in transition phase = $40.07

Present Value of Terminal Price = ($438.46)

Value of the stock = ($381.57)

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 Three-Stage Dividend Discount Model

MODEL

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7.11% 8.00% 0.00% 0.00%

55.48% 60.00%

$23.32 $25.18

$12.94 $15.11
0.66 0.66
6.32% 6.32% 0.00% 0.00%

$6.20 $6.81

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