Under the principle of “no more formulas to memorize”, is there a way to calculate V_0 using the two stage model without using the H formula? In the model, V_0 =[DIV_0 (1+G_m) + DIV_0 * H * (G_h-G_m)] / (r_ce - G_m). It would be nice if we can find the value at year k, when the supernormal growth ends and we start experiencing normal growth, then discount to t_0, etc.
The H Model is a shortcut of a multi-stage DDM, with an assumption that growth will decline liniarly from the super growth rate of the first stage, to the terminal constant growth rate stage. On the test, if a question on H Model comes up, you will be given the inputs of the Super growth rate, the duration of that super growth rate, as well as the regular g and r, so even if you come up with a novel idea of how get the value at that year k when the super growth period ends, I doubt it would be useful to you on the test.
You don’t think it would be useful if you answer it using the same method as other DDM models?
I think it would take you much longer than the 3 minutes alloted for the question if you start to play around on the test to figure out how to transform the inputs of the H model into a multi-stage DDM. Plus in addition to a calculation question given the inputs that you just plug into the formula, you may also need to answer a question or two on what the H model really does. So I don’t think it would be useful to recreate the wheel. Plust I think the H model is pretty straight forward, it starts with a gordon growth model, then adds the ugly part which is what you really need to memorize – [D0 x H x (gS - g)] / (r-g), where H = duration of the super growth period / 2, and gS = to the super growth rate.
I didn’t think there would be a straightforward way of converting to a 2-stage DDM, but it’s good to ask.
The H model really is easy to use when you get the formula. The first bit is just GGM for the stable growth part. If you have a diagram with you draw a line from the stable growth part backwards to the beginning of the declining growth part. This is the GGM part of the formula. The H part of the model cals the triangle above that line. (not sure whether I have explained this properly and i’ve just lost you…). Drawing this line helps you understand where to discount to. If there’s a stable growth bit before to then just calc the individual cash flows for those years and discount back using DDM. You will also need to discount back to t0 the two parts from above (ie the ggm bit and the h model bit. sorry if my explanation is cr@p
You’re right, it’s not difficult, but I only have a few remaining memory cells which I am trying to conserve for must-know formulas.
apparently the h model didnt come up last year, so on that basis its pretty possible they’ll test it this year!! worth memorising i think