Dividend Growth using two stage model

Quick question,

When they ask you to approach a two stage DDM, where it says dividend growth will be 14% for X years, then stabilize to 6%, you are supposed to square it going forward such as :

2.5 X 1.14 for 1st year

2.5 X 1.14^2 for second year

2.5 X 1.14 ^3 for third year and so forth … right?

For those of you who use Schweser, for study session 11 page 136 it shows this being done, but on the following study session on Free Cash Flow, it has an example on answer page 182, where they do not square it in the following year -it seems both are structured in the same way asking the same question. Why would I use exponents on one such example but not the other? Any help will be greatly appreciated!




I don’t know about Schweser notes. Next years’s dividend is previous year’s dividend x 1.14, if the vignette does NOT provide the next dividends. You will have to calulate them. Some vignetts provide series of next dividends, in that case, you don’t calculate the dividends. If they don’t provide, you will have to calcutate from the last dividend and calculate entire series of next dividends.

Does it help? I haven’t looked at Scwesher notes, yet? What question numbers are you talking about?

Rock. I’m referring to using exponents to calculate year after year. So if you have 5 years of a 2 dollar dividend growing by 15 percent you would multiply 2 by 1.15 first year. Second year 2 x 1.15^2 and third year 2x1.15^3 and so forth. One shows it like that the other shows it as growth without squaring the growth rate etc

if you are referring to the two stage H model -> there is no squaring involved.

Anyone here have Schwesers Equity book and mind looking at page question # 13 on page 175, and question # 14 on page 130. IT seems like they are asking the SAME thing (2 stage DDM) but one squares and cubes (etc) the growth rate when multiplying it by the dividend each year, the other just literally multiplies the dividend by the growth rate each year without involving exponents. I am looking for a reason why, it seems both questions are asking the same exact thing…forgive me but I am so frustrated by it!

Thanks all … please help for my sanity!

Are the growth rates the same in one question, and different in the other?

1.15 x 1.15 is the same as 1.15 squared so they may have just written it like that because it is shorter. But if the growth rates are different you would need to multiply them eg 1.15 x 1.08.

For the FCF question, they use the previous year dividends to calculate next year dividends; hence no need to square/cube.