3-Stages Model for FCFE

CFA Level II Equities
#1

Dear all,

I understand from Reading #34 that for 3 stage FCFE valuation model, a combination of discount rates are being used to discount cashflows (“CFs”) during the transitional period. For example,

High-growth period: r=20%

Transitional period: r= 10%

Stable-growth period: r=5%

A combination of 20% and 10% will be used to discount CFs during the transitional period.

Question: Does this applies to 3-stages DDM too? I understand that usually a single discount rate will be given to discount each period dividend. But what if different discount rate is used for different stage? Must we use a combination of Stage 1 and Stage 2 discount rates to discount CFs in Stage 2?

Thank you.

Ernest

#2

I’m pretty sure that those aren’t discount rates; they seem like growth rates.

#3

Hi Bill,

Thank you so much for looking into my query. I’m replicating an example from Schweser 2015 Notes Book 3 - Page 165. There is an unqiue discount rate at each stage.

Ernest

#4

Nowhere in the curriculum do I see an example where the required rate of return changes from one stage to another; only the growth rate is changing.

This sounds like someone trying to be too clever by half.

1 Like
#5

Thanks Bill. I shall follow the curriculum then!

#6

You’re welcome, Ernest.

#7

I just posted a question about this. Kaplan is still preferring such a question.

#8

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Thoughts?