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Lesson 5 of 9 · 14 min
Multistage dividend discount models
When growth will change, forecast the dividends of the unusual period one by one, value everything after it with the Gordon model as a terminal value at time n, and discount both back to today.
In short
- A company that pays no dividend yet can still be valued with a DDM by assuming when dividends start and how they grow.
- Two-stage DDM: high growth for n years, then sustainable growth forever.
- Terminal value sits at time n, so it is discounted n periods.
- Gordon: mature companies. Two-stage: companies moving from high to mature growth (or whose growth will recover toward normal). Three-stage: young companies just entering their growth phase.
- The terminal value usually supplies most of the total, so long-run assumptions dominate the answer.
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