Reference Guide to Using the 3-Stage Dividend Discount Model

Reference Guide to Using the 3-Stage Dividend Discount Model
* The gray cells are the information that is typed in
* The red cells are the output cells
Outside Estimate
Outside Estimate: Can be found on under earnings estimates
Historical Growth: EPS from 5 years ago- Can be found on the Value Line survey (use
2004's number)
Fundamental Growth
Current Estimate EPS: Use Value Line survey
Current Dividend/Share: Use Value Line survey
Book Value of Equity: Use Value Line survey
(Book Value/Share)
Outside Estimate:
Historical Growth:
Fundamental Growth:
For these cells you input the weights as a percentage.
The numbers should be based on you opinion of how the
company will grow and where you should put more
Cost of Equity
Risk Free Rate: 10 year T-bond which can be found on Yahoo finance on the front page
Market Risk Premium: This is your opinion of the current markets return is
Beta: Can be found on Value Line survey
Discount Rate: Is an output cell. It shouldn't be less than 5% or higher than 15%. If it is
there is a chance that some numbers are not right.
Second Worksheet
Payout Ratio in Stable Phase: Usually the payout ratio increases in the stable phase. It
can be calculated by dividing dividends/share by earnings/share for the past five years
and then taking the average of those numbers.
Length of Growth Stage: Research the stock and use your opinion on how long they
will grow.
Length of Transitional Stage: This is usually around 5 years but again use you opinion
based of your research.
Stable Growth Rate: The nominal rate at what the economy is currently growing at.
(e.g. 6%)