The Three-Phase Dividend Discount Model and the Rope Model
7 Pages Posted: 19 Oct 2005
The ROPE model is a three-phase model that generates estimates of future dividends by incorporating estimates of return on equity and payout ratios rather than assuming that dividend growth rates decline linearly as in the second stage of the three-phase model. Growth firms often experience an increase in dividends as they move toward maturity because rising payout rates counteract declines in return on equity. Although tests are difficult to carry out, they indicate that the ROPE model provides estimates that are closer to market prices than those of the standard three-phase model.
Keywords: dividend discount model, three-phase model, stock valuation, return on equity, payout
JEL Classification: G12, G14
Suggested Citation: Suggested Citation