Your in-house economist projects that FC dividends are expected to grow at 25%, 20%, 15% and 10% and 5% for the next 5 years. You are a financial analyst at AH Ventures, a diversified conglomerate, which has 10% stake in the company. G is the constant dividend growth rate Exampleįlamingo Communications (FC) is fast-growing IT startup specializing in social-media marketing. PV of stable growth dividendsĭn+1 is the dividend in the first year of the stable growth phase However, since the Gordon growth model calculates present value at the end for high growth period, it is further discounted back to t=0. The present value calculation of dividend payments in stable growth phase involves used of Gordon growth model, because in that phase the dividend growth rate is constant. Where r is the cost of equity and n is number of years in the high-growth phase. time=0).ĭividend per share in Year 2 = dividend per share in year 1 * (1 + growth rate in year 2). It is discounted one year back to valuation date (i.e.
To calculate the present value of dividend payments in the high growth phase, dividend per share for each year is individually projected and then discounted.ĭividend per share in year 1 = current dividend × (1 + growth rate in year 1).
Intrinsic value = PV of high growth phase dividends + PV of stable growth phase dividends The difference is that instead of assuming a constant dividend growth rate for all periods in future, the present value calculation is broken down into different phases. it bases intrinsic value on the present value of expected future cash flows of a stock. The basic concept behind the multi-stage dividend discount model is the same as constant-growth model, i.e. Multi-stage dividend discount model is a technique used to calculate intrinsic value of a stock by identifying different growth phases of a stock projecting dividends per share for each the periods in the high growth phase and discounting them to valuation date, finding terminal value at the start of the stable growth phase using the Gordon growth model, discounting it back to the valuation date and adding it to the present value of the high-growth phase dividends.
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