Two Ways to Value Dividends
Type 1 — Constant Growth
• Same dividend pattern each year with steady growth rate g.
• Finite horizon: P₀ = D₁
rₑ-g × (1-((1+g)/(1+rₑ))^T)
rₑ-g × (1-((1+g)/(1+rₑ))^T)
• Infinite horizon: P₀ = D₁
rₑ-g (if g < rₑ)
rₑ-g (if g < rₑ)
This game uses finite horizon calculations.
Type 2 — Two-Stage Growth
• First N years: fixed dividend while earnings grow fast.
• Then: pay percentage of earnings with slower long-term growth.
• Calculation: Sum early dividends + PV of later growing stream
This game uses finite horizon calculations.
Key Difference: Finite vs Infinite
• Finite: Calculate PV for exact number of years (T)
• Infinite: Assume dividends continue forever (terminal value)
• This game uses finite calculations for more realistic scenarios