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The key to getting the multi-stage growth models correct is to draw a time line. You’ll have to calculate the individual dividends during the high-growth periods (and discount them individually), but the final stage will always be constant growth (i.e., the Gordon growth model, GGM). Remember that the present value you get from the GGM is the value one period before the first dividend payment.Lloydas1 wrote: I sailed through equity until I hit the DDM. I get the basic one year, multi-year, and gordon growth models, but the super normal/multi-stage one is jamming me up. Im hitting all the questions in the Kap qbank before I move on to the next section but Im getting almost every single one wrong.
What is the significance of this part?S2000magician wrote:
The key to getting the multi-stage growth models correct is to draw a time line. You’ll have to calculate the individual dividends during the high-growth periods (and discount them individually), but the final stage will always be constant growth (i.e., the Gordon growth model, GGM). Remember that the present value you get from the GGM is the value one period before the first dividend payment.Lloydas1 wrote: I sailed through equity until I hit the DDM. I get the basic one year, multi-year, and gordon growth models, but the super normal/multi-stage one is jamming me up. Im hitting all the questions in the Kap qbank before I move on to the next section but Im getting almost every single one wrong.
sig wrote:
I can be totally wrong, but isn’t it just calculating the three future div, find terminal div, then discount everything to arrive to PV of CF?
So,
D0 = .4*5 = 2
D1 = 2(1.2) = 2.4
D2 = 2.88
D3 = 8.64
Find Dt = (8.64*1.05)/(.12-.05) = 129.57
Discount everything back, you get $102.8
Regarding S2000’s previous comment and this portion of your comment, you’re saying that you apply GGM to the year prior to the period of constant “forever” dividend growth? So even though the constant growth begins in year 4 you apply GGM to year 3?mskhan91 wrote:
I hope you see the significance of what S2000 wrote above “Remember that the present value you get from the GGM is the value one period before …”.
In the solution we applied GGM on the 4th year because earning increases at a constant growth rate of 5% from year 4. Hence when we applied GGM in year 4, its PV fall one year before i.e. in year 3.
What we’re saying is that when you use the GGM to get the present value of a series of dividend payments that start at, say, time t = 4, the present value that you get is the value at time t = 3; i.e., one period before the first dividend payment.Lloydas1 wrote:
Regarding S2000’s previous comment and this portion of your comment, you’re saying that you apply GGM to the year prior to the period of constant “forever” dividend growth? So even though the constant growth begins in year 4 you apply GGM to year 3?mskhan91 wrote: I hope you see the significance of what S2000 wrote above “Remember that the present value you get from the GGM is the value one period before …”.
In the solution we applied GGM on the 4th year because earning increases at a constant growth rate of 5% from year 4. Hence when we applied GGM in year 4, its PV fall one year before i.e. in year 3.
What a zinger. Truly, my feelings are so hurt. As I type this out, I’m literally crying at my desk. Oh no, there’s tears in my coffee now. What a failure I am in life. I haven’t amounted to anything. I guess I better kill myself now.Dark_Magician wrote:
Coming from the guy with 2054 AF points and negative AF karma…
All?CEO10K-DAY wrote: … if you know anything, all the heavy hitters on this forum have negative karma … .
Haha, fair point. Hoping I’m finally done with these exams and never have to bug you again.S2000magician wrote:
All?CEO10K-DAY wrote: … if you know anything, all the heavy hitters on this forum have negative karma … .