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| Share value with a dividend discounting model : 3-period model |
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Around the formula...
Over three periods lasting n1 years, n2
years, and up to infinity (for example : years 0 to 5, years 6 to 10, years 11
to infinity...), the dividend per share rises by g1 for n1-1
years, then by g2 for n2 years and then by g3
to infinity. Present value is then equal to:
Practically :
- The first period growth and length will depend on the company's "visibility",
i.e. the period of time over which is it reasonable to establish projections,
- During the last period, free cash flows growth rate is similar to the one
of the company's market or the economy as a whole or less,
- The second period making the transition between both periods...
This is the same formula as the one used to evaluate the enterprise value of a
company, but k has been replaced by kE and the free cash flows (F)
by the dividends per share (DPS).
See also Vernimmen Chapter
16
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