Variable Growth Model
As a dividend valuation approach, this model incorporates a change in the dividend growth rate. Assuming g = initial growth rate and g = the subsequent growth rate occurs at the, end of year N, the value of the shares can be determined as follows:
Step 1: Compute the value of cash dividends at the end of each year (D) during the initial growth period (years 1 - N). Symbolically,
D, = Do * (1 + g) = D0 * PVIF t
Step 2: Compute the present value of the dividends expected during the initial growth period. Symbolically,
Step 3: Find the value of the share at the end of the initial growth year. This is the present value of all dividends expected from year N + 1 onward s assuming a constant dividend growth rate. g, The present value of p would represent the value today of all dividends expected to be received from year N+1 to infinity. Symbolically,
Step 4: Add the present value components found in Step 2 and 3 to find the value of share, P given in Equation 4.9.
We illustrate the computation of the value of shares with only one growth rate change.