The stock can be valued using the H model:
Thestockwastradingat£5.84inNovember2005,makingit
close to fairly valued.
Three-Stage Dividend Discount Model
The three-stage dividend discount model combines the
featuresofthetwo-stagemodelandtheHmodel.It isthe
mostgeneralofthemodelsbecauseitdoesnotimposeany
restrictionsonthepayoutratioandassumesaninitialperiod
ofstablehighgrowth,a secondperiodofdeclininggrowth
and athirdperiodof stablelowgrowth, thatlasts forever.
Figure 5.3graphs theexpectedgrowthover thethreetime
periods.Thevalueofthestockisthenthepresentvalueof
expected dividends during the high-growth and the
transitionalperiodsandoftheterminalpriceatthestartofthe
final stable-growth phase.
where
EPSt= Earnings per share in yeart
DPSt= Dividends per share in yeart