Lesson 5 of 11 · All lessons in this module
- Present value models: DDM and FCFEVideo lesson
- Choosing the cash flow: dividends or FCFE
- FCFF, EBITDA and residual income
- Preferred stock and the Gordon growth modelVideo lesson
- Multistage dividend discount modelsVideo lesson
- Growth assumptions for any cash flow: constant, implied and two-stage
- The DCF process: discount rates, terminal values and ranges
- Integrated cases: negative growth and reconciling FCFE with FCFF
- Integrated cases: two-stage FCFF with debt, and the effect of the debt ratio
- Shortcomings of constant and multistage growth models
- Preferred shares: required return and contingency features
This lesson is part of the 2027 curriculum. You are following the 2026 curriculum, where it is not taught in this form. Switch if you are sitting the exam under the 2027 curriculum.
Lesson 5 of 11 · 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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