Reference Guide to Using the 3-Stage Dividend Discount Model

Reference Guide to Using the 3-Stage Dividend Discount Model

* The gray cells are the information that is typed in

* The red cells are the output cells

Outside Estimate

Outside Estimate: Can be found on Zacks.com under earnings estimates

Historical Growth: EPS from 5 years ago- Can be found on the Value Line survey (use 2004's number)

Fundamental Growth

Current Estimate EPS: Use Value Line survey

Current Dividend/Share: Use Value Line survey

Book Value of Equity: Use Value Line survey

(Book Value/Share)

Outside Estimate:

Historical Growth: For these cells you input the weights as a percentage.

Fundamental Growth: The numbers should be based on you opinion of how the company will grow and where you should put more weight.

Cost of Equity

Risk Free Rate: 10 year T-bond which can be found on Yahoo finance on the front page

Market Risk Premium: This is your opinion of the current markets return is

Beta: Can be found on Value Line survey

Discount Rate: Is an output cell. It shouldn't be less than 5% or higher than 15%. If it is there is a chance that some numbers are not right.

Second Worksheet

Payout Ratio in Stable Phase: Usually the payout ratio increases in the stable phase. It can be calculated by dividing dividends/share by earnings/share for the past five years and then taking the average of those numbers.

Length of Growth Stage: Research the stock and use your opinion on how long they will grow.

Length of Transitional Stage: This is usually around 5 years but again use you opinion based of your research.

Stable Growth Rate: The nominal rate at what the economy is currently growing at. (e.g. 6%)