Two-Stage Dividend Discount Model
A company pays a dividend of EUR 1 per share today. Growth of 15% is expected for the next two years, after which the growth rate will likely fall to 3% for the long term. Assuming a 9% discount rate, what is the present value of dividends in the first stage?
Not quite.
This is the present value of the current dividend and the Year 1 dividend, but stage 1 includes dividends after today and until the terminal price is calculated.
Precisely!
The first stage dividends are those in Year 1 and Year 2, discounted to the present:
$$\displaystyle V_{0, \mbox {stage} 1} = \frac{1(1 + 0.15)}{1 + 0.09} + \frac{1(1 + 0.15)^2}{(1 + 0.09)^2} = 1.06 + 1.11 = 2.17 $$
No.
This assumes that both dividends are received in Year 1.
EUR 2.06
EUR 2.17
EUR 2.27
