# DDM

Bybee is expected to have a temporary supernormal growth period and then level off to a “normal,” sustainable growth rate forever. The supernormal growth is expected to be 25 percent for 2 years, 20 percent for one year and then level off to a normal growth rate of 8 percent forever. The market requires a 14 percent return on the company and the company last paid a \$2.00 dividend. What would the market be willing to pay for the stock today?

The market would be willing to pay exactly \$52.69 per share for that stock.

\$52.69

Isn’t it supposed to be: D1 = 2.00 (1.25) = 2.50 (1.25) = D2 = 3.125 (1.20) = D3 = 3.75 (1.08) = D4 = 4.05. P3 = 4.05/(0.14-0.08) = 67.5 Then discounting the cash flows… Is it just the 25% that we account for as the supernormal growth ? The following is the methodology given by Schweser D1 = 2.00 (1.25) = 2.50 (1.25) = D2 = 3.125 (1.20) = D3 = 3.75 P2 = 3.75/(0.14 - 0.08) = 62.50 N = 1; I/Y = 14; FV = 2.50; compute PV = 2.19. N = 2; I/Y = 14; FV = 3.125; compute PV = 2.40. N = 2; I/Y = 14; FV = 62.50; compute PV = 48.09. Now sum the PV’s: 2.19 + 2.40 + 48.09 = \$52.68.

I have D1 = 2.5 -> Discounted = 2.193 D2 = 3.125 -> Discounted = 2.4046 D3 = 3.75 -> Discounted = 2.5311 Price = 4.05 / (0.14 - 0.08) = 67.50 -> Discounted = 45.5605 2.193 + 2.4046 + 2.5311 + 45.5605 = \$52.6892 = \$52.69.

Thanks !!!

Damil4real Wrote: ------------------------------------------------------- > I have > > D1 = 2.5 -> Discounted = 2.193 > D2 = 3.125 -> Discounted = 2.4046 > D3 = 3.75 -> Discounted = 2.5311 > > Price = 4.05 / (0.14 - 0.08) = 67.50 -> Discounted > = 45.5605 > > 2.193 + 2.4046 + 2.5311 + 45.5605 = \$52.6892 = > 52.69. I like Damil4real's answer better. Rounding is for @#%&.