# Dividend Discount Model

This is a pretty straightforward problem. Just that I am getting 53.68 using the CF worksheet. If someone could confirm that 53.68 is the correct answer that’d be great. If you get 52.68 and use the CF WS, then please give the inputs as well. Thanks in advance. 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? A) \$47.09. B) \$76.88. C) \$52.68. D) \$67.50. Your answer: C was correct! First, find the future dividends at the supernormal growth rate(s). Next, use the infinite period dividend discount model to find the expected price after the supernormal growth period ends. Third, find the present value of the cash flow stream. 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.

Your flows are slightly wrong. D1 = 2.5 D2 = 3.125 D3 = 3.75 P3 = 3.75 * 1.08 / (0.14 - 0.08) = 67.5 Now use CF CF1 = 2.5, F1= 1 Cf2 = 3.125, F2 = 1 CF3 = 3.75 + 67.5 = 71.25, F3 = 1 Calc NPV at 14% ==> 52.69 CP