1. What is the Two Stage Dividend Discount Model?

The Two Stage Dividend Discount Model (DDM) is a valuation method that assumes a company will go through two stages of growth - an initial high growth phase followed by a stable growth phase. It's particularly useful for companies expected to have a period of high growth before settling into a more mature growth pattern.

2. How Does the Calculator Work?

The calculator uses the Two Stage DDM formula:

Where:

• \( PV\ Stage1\ Dividends \) — Present value of dividends during high growth period
• \( PV\ Terminal\ Value \) — Present value of all dividends after high growth period
• \( D0 \) — Current dividend per share
• \( g1 \) — High growth rate
• \( g2 \) — Stable growth rate
• \( n \) — Number of years in high growth period
• \( r \) — Required rate of return (discount rate)

Explanation: The model calculates the present value of dividends during the high growth phase and adds it to the present value of the terminal value (all future dividends beyond the high growth phase).

3. Importance of Two Stage DDM

Details: This model is particularly useful for valuing companies that are expected to experience a period of rapid growth followed by a period of stable growth, such as technology companies or firms in emerging industries.

4. Using the Calculator

Tips: Enter current dividend in USD, growth rates as percentages, number of years for high growth period, and discount rate as percentage. All values must be positive.

5. Frequently Asked Questions (FAQ)

Q1: When should I use the Two Stage DDM instead of the Gordon Growth Model?
A: Use the Two Stage DDM when a company is expected to have a period of high growth before settling into a stable growth pattern, while the Gordon Growth Model assumes constant growth forever.

Q2: How do I estimate the high growth period?
A: The high growth period should reflect how long you expect the company to maintain above-average growth. This could be based on competitive advantages, industry growth, or product cycles.

Q3: What's a reasonable stable growth rate?
A: The stable growth rate should typically not exceed the long-term growth rate of the economy (usually 2-3% in developed markets).

Q4: How sensitive is the model to the discount rate?
A: The model is very sensitive to the discount rate, as it affects both the present value of stage 1 dividends and the terminal value. Small changes can lead to large valuation differences.

Q5: Can this model be used for non-dividend paying stocks?
A: No, the DDM requires dividends as inputs. For non-dividend payers, you might consider free cash flow models instead.