# DDM

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.

KJH Wrote: ------------------------------------------------------- > 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. EASY. it is A i did a DDM and got a \$18.70 price target boom

You’re right. Can you explain. SS 14 is one of my weaker areas.

KJH Wrote: ------------------------------------------------------- > You’re right. Can you explain. SS 14 is one of > my weaker areas. it is better you read the section again. in a nutshell, a stocks price = PV of future cash flows. so we do DCF. DDM, FCFE, FCFF are all forms of DCF DDM discounts dividends. in last year, you have to add the yr div to the TERMINAL VALUE OF FIRM, and discount that combo @ 1.15^ 3 that is it takeway is that a stock price reflects future expectations AND that a BIG ASS CHUNK of a company’s vlaue is in its terminal value, which should freak you out b/c there is no guarantee any company will be around tomorrow look @ ENRON and Parmalat that is it BOOM