Multistage Dividend Discount vs. FCFE

[keep_running]

Dividends are increasing 25% per year for the last four years. How is the multistage dividends discount model more appropriate for valuation than the single stage FCFE model?
I also do not get how you can interpret the 25% growth rate as a finite growth rate (thus unable to use the Gordan Growth Perpetuity Rate). Maybe I am being black and white on this issue, but how could you interpret a finite growth rate from a long term growth rate?

 

[busprof]

It’s hard to answer the questions without a few more details. But here goes.
Both a single-stage DDM and a single-stage FCFE model make the assumptions that (1) the firm pays dividends (DDM) or has positive FCFE, and that those cash flows will grow at a relatively constant rate into the foreseeable future. As such, they’re typically approppriate for valuing mature firms in relatively sturated markets. In these cases, future profits and FCFE will grow mostly by either price increases due to inflation or due to population grworth (rememebr- they’re in saturated markets).
Multi-stage models are appropriate when you expect a firm to have abnormally high growth in dividends or FCF over some initial period and then eventually end up with a long-term constant growth rate. The only differece between the various multi-stage models is the trajectory the growth rates take.
In the case you mentioned, since the firm has experienced surpernormal growth in the last few years, you can;t assume that the near-historical-term growth rates will continue. So, a single-stage model is inappropriate (I’d assume that FCFE has also been growing at a rapid rate over the last 3 years).
The likely approach would be to assume that the 25% growth rate would either trend downwards to a stable long-term rate over some period of years (the H-model), or continue for some period of years and then drop all the way to the stable long-term rate (like if it were due to a soon-to-expire patent).
Hope that helps.