What is the two-stage dividend discount model?

P0 = Σ Dt ÷ (1 + r)t for the high-growth years + [DN+1 ÷ (r − g2)] ÷ (1 + r)N.

What is the terminal value?

The value at the end of the high-growth stage of all dividends after that, computed with the Gordon growth model.

Can the first-stage growth rate be higher than the required return?

Yes. Only the stable, second-stage growth rate must be below r.

How do I choose the stable growth rate?

Usually close to long-run nominal economic growth or inflation, often 2–5%.

Two-Stage Dividend Discount Model

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Two-Stage Dividend Discount Model Calculator

The dividend discount model values a share as the present value of the dividends it will pay. The two-stage version fits companies whose dividends are expected to grow quickly for a few years and then settle into slower, stable growth. The first stage is valued dividend by dividend; the second stage is valued with the Gordon growth model as a terminal value at the end of year N.

Formula

P₀ = Σ_t=1^N D₀(1 + g₁)^t(1 + r)^t + 1(1 + r)^N × D_N(1 + g₂)r − g₂

Where

D₀: dividend just paid
g₁: high growth rate for the first N years
N: length of the high-growth stage in years
g₂: stable growth rate forever after year N (g₂ < r)
r: required rate of return

Calculator

Dividend just paid (D₀)

High growth rate (g₁) (%)

Years of high growth (N)

Stable growth rate (g₂) (%)

Required return (r) (%)

Result and step-by-step solution

Intrinsic value per share

36.37

High-growth dividends are worth 7.92 today and the terminal value 28.45 (78.2% of the total).

Project and discount the high-growth dividends
Year Dividend Discount factor PV
1 1.68 0.909091 1.5273
2 1.8816 0.826446 1.555
3 2.1074 0.751315 1.5833
4 2.3603 0.683013 1.6121
5 2.6435 0.620921 1.6414
Sum = 7.9191
Terminal value at year 5
D₆ = 2.6435 × (1 + 0.04) = 2.7493; TV = 2.74930.06 = 45.82
Discount the terminal value
45.82(1 + 0.1)⁵ = 28.45
Add the two parts
P₀ = 7.9191 + 28.4512 = 36.37

Year	Dividend	Discount factor	PV
1	1.68	0.909091	1.5273
2	1.8816	0.826446	1.555
3	2.1074	0.751315	1.5833
4	2.3603	0.683013	1.6121
5	2.6435	0.620921	1.6414

How to use the formula

The calculator projects each high-growth dividend D₀(1 + g₁)^t, discounts it at the required return r and adds them up. It then takes the dividend for year N + 1, divides by r − g₂ to get the terminal value at year N, and discounts that back N years. The two parts together are the intrinsic value.

With a dividend of 1.50 just paid, 12% growth for 5 years, 4% growth thereafter and a 10% required return, the five high-growth dividends are worth 7.92 today and the terminal value 28.45, for a total of 36.37 per share. More than three quarters of the value comes from the terminal stage, which is typical and shows why the long-run growth assumption deserves the most care.

Frequently asked questions

What is the two-stage dividend discount model?: P₀ = Σ D_t ÷ (1 + r)^t for the high-growth years + [D_N+1 ÷ (r − g₂)] ÷ (1 + r)^N.
What is the terminal value?: The value at the end of the high-growth stage of all dividends after that, computed with the Gordon growth model.
Can the first-stage growth rate be higher than the required return?: Yes. Only the stable, second-stage growth rate must be below r.
How do I choose the stable growth rate?: Usually close to long-run nominal economic growth or inflation, often 2–5%.

Last reviewed: September 26, 2026. Calculations run in your browser and were checked against numpy-financial, SciPy and published spreadsheet examples.