The value of equity per share can then be computed:
Thestockwastradingat$38inearlyNovemberof2005,very
close to our estimated value per share.
Two-Stage Dividend Discount Model
The two-stage growth model allows for two stages of
growth—aninitialphasewherethegrowthrateisnotastable
growthrateandasubsequentsteadystatewherethegrowth
rateisstableandisexpectedtoremainsoforthelongterm.
Whileinmostcasesthegrowthrateduringtheinitialphaseis
higherthanthestablegrowthrate,themodelcanbeadapted
to value companies that areexpectedto postlow or even
negativegrowthratesforafewyearsandthenreverttostable
growth.Inthedividenddiscountmodel,thevalueofequity
can be written as:
where
DPSt= Expected dividends per share in yeart
ke=Costofequity(hg:high-growthperiod;st:stable-growth
period)