# DDM - Still having problems.

Use the following information and the multi-period dividend discount model to find the value of Computech’s common stock. * Last year’s dividend was \$1.62. * The dividend is expected to grow at 12% for three years. * The growth rate of dividends after three years is expected to stabilize at 4%. * The required return for Computech’s common stock is 15%. Which of the following statements about Computech’s stock is least accurate? A) Computech’s stock is currently worth \$17.46. B) At the end of two years, Computech’s stock will sell for \$20.64. C) The dividend at the end of year three is expected to be \$2.27. D) The dividend at the end of year four is expected to be \$2.36.

A

i agree, stock price would be \$18.76

Okay, I get the dividends, I always forget how to figure the stock price.

I would say A. A: I get \$18.77 B: at the end of 2 years P2 = D3/.15-.04 = \$20.73 C: I calculated \$2.28 D: I calculated \$2.37 Therefore, by process of elimination, if my calculations are correct, A is least accurate…

second getterdone

P3 = D4/k-g Then you take P3 and divide by 1.15^3

A is right. I was getting 18.17. You guys get 18.76 which is what they got. Can someone give me the exact calc?

CF0=0 CF1=1.62*1.12 CF2=1.62*1.12^2 CF3=1.62*1.12^3+1.62*1.12^3*1.04/(.15-.04) Hit NPV, with I/Y=15, that’s almost 18.76

D1= Do(1+g)= 1.62(1+.12)= 1.81 D2= D1(1+g)= 1.81(1+.12)= 2.03 D3= D2(1+g)= 2.03(1+.12)= 2.27 P4= 2.27(1,04)/0.15 - 0.04= 2.36/0.11=21.46 P= 1.81/(1,15) + 2.03/(1,15)^2 + 2.27+21.46/(1.15)^3 = =1.57 + 1.53 + 15.61= 18.71 A

A. damn,but it took me 3 minutes to do it. the stock price I got using the DDM model was \$18.66 I ALWAYS combine the last step to save time Y3 = (2.36/.11 + 2.27) / (1.15)^3 etc 2.36/.11 is simply the TERMINAL VALUE component of DCF (my fave : ) )

D1 = 1.62*1.12/1.15 = 1.57 D2 = 1.62*1.12^2/1.15^2 = 1.53 D3 = 1.62*1.12^3/1.15^3 = 1.50 P3 = ([1.62*1.12^3*1.04/.15-.04)]/1.12^3 = 14.16 Add them all together and you get 18.76

Got it now. I always screw up on the final component. Thanks guys