Two-Stage Dividend Discount Model

THREE-STAGE FCFE DISCOUNT MODEL

This model is designed to value the equity in a firm with three stages of grow
period of high growth, a transition period of declining growth and a final perio
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 specifie
3. The growth rate declines linearly over the transition period to a stable growth rate.

4. The relationship between capital spending and depreciation changes consistently with t
The user should enter the following inputs:
1. Length of each growth phase
2. Growth rate in each growth phase
3. Capital Spending, Depreciation and Working Capital in each growth phase.
4. Costs of Equity in each growth phase

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Two-Stage Dividend Discount Model

Inputs to the model

General Inputs
Current Earnings per share

$44.88

(in currency)

Current Dividends per sha

$14.97

(in currency)

Current Capital Spending/

$54.70

(in currency)

Current Depreciation / sha

$25.28

(in currency)

Current Revenues/ share = $328.33

Working Capital/ share =

($231.03)

Chg. Working Capital/shar

$1.66

(in currency)

Do you want to enter cost of equity direc

No

If yes, enter the cost of equity =

(Yes or No)
(in percent)

If no, enter the inputs to the cost of equity for the initial high growth stage
Beta of the stock =

0.8

Riskfree rate=

5.00%

(in percent)

Risk Premium=

8.50%

(in percent)

Earnings Inputs
Growth Rate during the initial high growth phase
Enter length of extraordinary growth pe

(in years)

Do you want to use the historical growth

No

(Yes or No)

If yes, enter EPS from five years ago =

$0.90

(in currency)

Do you have an outside estimate of gro

No

(Yes or No)

20.00%

(in percent)

If yes, enter the estimated growth:

Do you want to calculate the growth rate from funda

Yes

If yes, enter the following inputs:

Net Income Currently =

$324.90

(in currency)

Interest Expense Currently

$257.20

(in currency)

$1,051.00

(in currency)

Book Value of Debt =

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(Yes or No)

Two-Stage Dividend Discount Model

Book Value of Equity =

Tax Rate on Income=

$1,326.00

(in currency)

32.00%

(in percent)

The following will be the inputs to the fundamental growth formulation:

ROA =

21.03%

D/E =

77.00%

(in percent)

Retention =

66.64%

Interest Rate

24.47%

(in percent)

Do you want to change any of these inputs for the hi

Yes

(Yes or No)

If yes, specify the values for these inputs (Please enter all variables)
ROA =

15.00%

D/E =

Retention =

66.64%

Interest Rate

77.00%

(in percent)

8.25%

(in percent)

Do you want to change any of these inputs for the st

Yes

If yes, specify the values for these inputs

ROA =

12.00%

D/E =

77.00%

(in percent)

Interest Rate

14.00%

(in percent)

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(Yes or No)

Two-Stage Dividend Discount Model

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

Historical Growth Rate =

0.00%

(in percent)

Outside Prediction of Growth =

0.00%

(in percent)

100.00%

(in percent)

Fundamental Estimate of Growth =

Growth Rate during the transition period

Enter length of the transition period =

(in years)

Do you want the beta to adjust gradually to stable be

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 perio

5.00%

(in percent)

Will the beta change in the stable perio

Yes

(Yes or No)

If yes, enter the beta for stable period =

Capital Spending, Depreciation & Working Capital

Do you want all these items to grow at the same rate

Yes

(Yes or No)

If not, enter the growth rates for each of the following items:
Capital SpendDepreciation

Revenues

High Growth

20.00%

20.00%

18.00%

(in percent)

Transition per

12.00%

12.00%

12.00%

(in percent)

6.00%

(in percent)

Stable Growt Do not enter Do not enter

Do you want to keep the current fraction of working c

If no, specify working capital as a perce

5.00%

Do you want to use the current debt ratio as your des

No
(in percent)
Yes

If no, enter the following inputs for financing mix,

Desired debt financing proportion - Capi

15.00%

(in percent)

Desired debt financing proportion - Work

15.00%

(in percent)

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(Yes or No)

(Yes or No)

Two-Stage Dividend Discount Model

Stable Growth Inputs for Capital Expenditures and Depreciation

Is capital spending to be offset by depreciation in sta
If no, enter capital expenditures as % of depreciation

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No

(Yes or No)

150% (in percent: > 100%)

Two-Stage Dividend Discount Model

Before reviewing the output, check to see if any warnings appear on the next page.

Warnings

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Two-Stage Dividend Discount Model

Output from the program

Initial High Growth Phase
Cost of Equity =

14.44%

Current Earnings per shar

$44.88

Proportion of Debt: Capital Spending (D

43.50%

Proportion of Debt: Working Capital (DR

43.50%

Current Earnings per share=

$44.88

(Capital Spending - Depreciation)*(1-DR

$16.62

Change in Working Capital * (1-DR)

$0.94

Current FCFE

$27.32

Growth Rate in Earnings per share - Initial High Growth phase

Growth Rate

Weight

Historical Growth =

0.00%

0.00%

Outside Estimates =

0.00%

0.00%

Fundamental Growth =

14.82%

100.00%

Weighted Average

14.82%

Growth Rate in capital spending, depreciation and working capital

High GrowthTransition period
Stable Growth
Growth rate in capital spe

14.82%

Earnings g

5.00%

Growth rate in depreciatio

14.82%

Earnings g

5.00%

Growth rate in revenues =

14.82%

Earnings g

5.00%

5.00%

(in percent)

Working Capital as percent of revenues

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

Earnings

$51.53

$59.16

$67.93

$77.99

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Two-Stage Dividend Discount Model

(CapEx-Depreciation)*(1-D

$19.09

$21.91

$25.16

$28.89

Chg. Working Capital *(1-D

$1.37

$1.58

$1.81

$2.08

FCFE

$31.07

$35.67

$40.96

$47.02

Present Value

$27.15

$27.24

$27.33

$27.42

Growth Rate

12.85%

10.89%

8.93%

6.96%

Cumulated Growth

12.85%

25.14%

36.31%

45.80%

$101.06

$112.06

$122.06

$130.56

(CapEx-Depreciation)*(1-D

$37.43

$41.51

$45.21

$48.36

Chg. Working Capital *(1-D

$2.38

$2.27

$2.07

$1.76

FCFE

$61.25

$68.28

$74.78

$80.44

Beta

0.84

0.88

0.92

0.96

Cost of Equity

12.14%

12.48%

12.82%

13.16%

Present Value

$27.82

$27.58

$26.77

$25.45

Transition period (upto ten years)

Year

Earnings

End-of-Life Index
Stable Growth Phase
Growth Rate in Stable Phase =

5.00%

FCFE in terminal year =

$119.62

Cost of Equity in Stable Phase =

12.50%

Price at the end of growth phase =

$1,594.98

Present Value of FCFE in high growth phase =

$136.63

Present Value of FCFE in transition phase =

$131.31

Present Value of Terminal Price =

$444.59

Value of the stock =

$712.53

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Two-Stage Dividend Discount Model

MODEL

e stages of growth - an initial

and a final period of stable

t has to be specified.

le growth rate.

s consistently with the growth rate.

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ent: > 100%)

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e next page.

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5
$89.55

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Two-Stage Dividend Discount Model

$33.17
$2.39
$53.99
$27.51

10

Terminal Year

5.00%

0.00%

0.00%

0.00%

0.00%

0.00%

53.09%

0.00%

0.00%

0.00%

0.00%

0.00%

$137.09

$0.00

$0.00

$0.00

$0.00

$0.00

$143.94

$50.78

$0.00

$0.00

$0.00

$0.00

$0.00

$22.90

$1.35

$0.00

$0.00

$0.00

$0.00

$0.00

$1.42

$84.96

$0.00

$0.00

$0.00

$0.00

$0.00

$119.62

0.00%

0.00%

0.00%

0.00%

0.00%

1
13.50%
$23.68
1

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0.00%

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rminal Year

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