| shareValUsingTwoStageDDM {stockAnalyst} | R Documentation |
Calculate value of a share using the two-stage Dividend Discount Model (DDM).
Description
Two-stage DDM provides for a high growth rate for the initial period, followed by a sustainable and usually lower growth rate thereafter. The two-stage DDM is based on the multiple-period model. The two-stage model assumes that the first n dividends grow at an extraordinary short-term rate(gS) and after time n, the annual dividend growth rate changes to a normal long-term rate (gL). The two-stage DDM is useful because many scenarios exist in which a company can achieve a super-normal growth rate for a few years, after which time the growth rate falls to a more sustainable level. For example, a company may achieve super-normal growth through possession of a patent, first-mover advantage, or another factor that provides a temporary lead in a specific marketplace. Subsequently, earnings will most likely descend to a level that is more consistent with competition and growth in the overall economy. Accordingly, that is why in the two-stage model, extraordinary growth is often forecast for a few years and normal growth is forecast thereafter. A possible limitation of the two-stage model is that the transition between the initial abnormal growth period and the final steady-state growth period is abrupt (Jerald E. Pinto, 2020).
Usage
shareValUsingTwoStageDDM(divNot, r, n, gS, gL)
Arguments
divNot |
A number. |
r |
A number. |
n |
A number. |
gS |
A number. |
gL |
A number. |
Details
According to information provided by Jerald E. Pinto (2020), the method shareValUsingtwoStageHmodel is developed to compute value of share using two stage H-Model for the values passed to its five arguments. Here, divNot is dollar value of the current dividend, r is required rate of return on equity, n is number of years of super-normal growth period, gS is initial short-term dividend growth rate, and gL is normal long-term dividend growth rate.
Value
Input values to five arguments divNot , r, n, gS and gL.
Author(s)
MaheshP Kumar, maheshparamjitkumar@gmail.com
References
Pinto, J. E. (2020). Equity Asset Valuation (4th ed.). Wiley Professional Development (P&T). https://bookshelf.vitalsource.com/books/9781119628194
Examples
shareValUsingTwoStageDDM(divNot=0.14, r=0.097,n=10,gS=0.15,gL=0.08)
shareValUsingTwoStageDDM(divNot=0.40, r=0.071,n=10,gS=0.09,gL=0.05)