Equity valuation: Multi-stage DDM

Another question I had to ask, because, depending on how confusing the question is stated, I might fall in a boobytrap.

Say the current dividend paid in cash of company ABC is 2€ per share. The growth of dividend cash distribution is estimated to be 20% for the next three years, and a mature stable growth of 5% after that. “Ke” is 10%.

P0 = (2.4/1.1) + (2.88/1.1^2) + (3.456/1.1^3) + [(3.62/0.05)/1.1^3] = 61.55

P0 = (2.4/1.1) + (2.88/1.1^2) + [(3.456/0.05)/1.1^2] = _ 61.68 _

Both calculations yield approximately the same result. I have noticed i tend to use the first one, while the Schweser and the CFAI tend to use the second. Are both techniques safe to use? Will they always yield approximately the same results?

Bump!

In your first formulation, the last dividend should be 3.6288, which rounds to 3.63, not 3.62.

That’s the source of the discrepancy.