 # DDM practice exam

Hi, I need help solving this one. (schweser book 6 pg 27, q96) Beachball Inc expects abnormally high earnings for the next 3 years., due to the forecast of unusually hot summers. After the 3-y period, their growth will levell off to its normal rate of 6%. Dividends and earnings are expected to grow at 20% for year 1 and 2, and 15% in year 3. The last dividend paid is \$1. If the investor requires 10% return on Beachball.Inc: Answer is value today= 36.50 But than… If she is planning on selling beachbvalls inc. after one year, the price will be closest to: ???, correct answer is 28.45??? How do they calculated the last part?/ Please advise.

D2= 1*1.2*1.2 = 1.44. Discount back to Yr 1 at 10% = 1.44/1.1= 1.309 D3 = 1.44*1.15 = 1.656. Discount back to Yr 1 @ 10% = 1.656/1.1^2 = 1.369 P3 = 1.656*1.06/(10%-6%) = 43.884. Discount back to yr 1: 36.268 total = 38.94 Correct answer is C. You’ve looked up the wrong answer.

Wow is that the second time today this has happened? The stress must be getting to people…haha