Intelligent Semiconductor Share Valuation Using Multi-stage Dividend Discount Model

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The multi-stage dividend discount model is a more realistic way of valuing fast-growing companies that pay dividends. With this model, it is necessary to estimate the above-average, or "supernormal," rate ofgrowth, as well as the long-term rate of growth. Once these growth rates have been determined, they are used to calculate the dividends at various points in the future. In this example, you are provided with two supernormal growth rates, in addition to the long-term rate of growth. Since two supernormal growth rates exist for Intelligent Semiconductor, the calculation is somewhat more complex than a situation characterized by a single supernormal growth rate. Nonetheless, the multi-stage dividend discount model can be applied.

The multi-stage dividend discount model is often referred to as the "two-stage dividend discount model," and these two titles should be considered interchangeable for all intents and purposes, i.e. the "two stage" dividend discount model can be used to determine the value of a company that has multiple growth rate changes.

Incorporating the given information into the multi-stage dividend discount model will yield the following:

P = {[$0.70 * 1.35) / 1.145] + [($0.945 * 1.35) / 1.31103] + [($1.276 * 1.25) / 1.50112] + [($1.595 * 1.25) / 1.71879] + [($1.994 * 1.12) / (.145 - .12]/1.71879}

Which can further be developed into:

P = {$0.82533 + $0.97309 + $1.06254 + $1.15998 + $51.96} = $55.98