Chapter 13, Problem 8CP

Summary Introduction

Definition of Two Stage Dividend Discount Model: The two-stage dividend discount model comprises two parts and assumes that dividends will go through two stages of growth. In the first stage, the dividend grows by a constant rate for a set amount of time. In the second, the dividend is assumed to grow at a different rate for the remainder of the company's life. In this way, the second part of the two-stage model is basically identical to the Constant Dividend Discount Model

The two-stage model is often used to determine the intrinsic value of a stock issued by a company that is undergoing rapid expansion. The first stage of two-stage dividend growth is generally assumed to be quite aggressive, reflecting the company's swift expansion, while the second stage assumes a lower, more sustainable rate of dividend growth.