# 2 stage DDM question

CFA EOC ?'s for reading equity reading #42, question 23. When using a two stage DDM to calculate terminal value and proportion of value represented by the second stage is it necessary to calculate and present value every dividend so this amount can be determined? Also it seems like a disproportionate share, 90%, is being valued towards the second stage when the growth rate is much lower. What is technically considered second stage? Seems like this would be a really time consuming question on the exam. Thanks, John

Clearly we have to get the value of the stage one div in order to get the portion value… If g was less than r there would have been a sneaky way to get the total pv of those div, but it cant work here the method would be get the value of an infinitely growing annuity (pays from time 1 till infinite) at time 0 but since in reality what we have is only an 8 year annuity you subtract the value of an infinity growing annuity (from 9 till infinite) at time 8 might seem complicated but it realy is not, all you do is (d0*(1+g))/(r-g)) and subtract (d8*(1+g))/r-g))

also, i just wonder man, do you know how to punsh in cash flows into your calculator ? cause i solved this question in under a min…quickly write down the divds then punsh them into the calculator… “Also it seems like a disproportionate share, 90%, is being valued towards the second stage when the growth rate is much lower. What is technically considered second stage?” nothing disproportionate about it, the first part is the value of 8 years only the second part is the value of 100000000000000000000000000000000000 years… actually you would get the same result by doing the value of maybe just 100 years cause the PV of cashflows after that becomes 0.0001… but the point is the second part is giving the value of cashflows till infinite so nothing weird going on…

correction: all you do is (d0*(1+g))/(r-g)) and subtract (d8*(1+g))/r-g))/(1+r)^8