My Question is, I don’t understand the last calculation. I can get the dividend payments and the expected value in of the stock in the future. When I try to discount it I don’t get this line N = 2; I/Y = 14; FV = 62.50; compute PV = 48.09. What happened to the 3.75 dividend payment. Why is N = 2? I thought it N= 3 or 4. 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: D was incorrect. The correct answer was C) $52.68. 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.
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