Hello all, this is the one of questions from an old mock exam paper:
I’ve been doing the same calc for all these types of multi-stage DDM questions and have encountered no issues. However, with the question below I can’t seem to get the answer to what they give?
Does anyone know what I’m doing wrong here?
Q) Marc Juneau, CFA, an equity analyst, is valuing Nova Games, Inc. He expects the company to grow at 30% for three years. Beginning in year 4, the growth rate is expected to reach 7% and stabilize. The required rate of return for this type of company is estimated at 13%. The dividend in year 1 will be $3.00. The value Juneau should calculate for the stock of Nova Games is closest to:
- A. $65.
- B. $72.
- C. $87.
Answer is B. $72
My calc:
6.591/0.13-0.07 = $109.85
109.85/1.13^2 + 5.07/1.13^2 + 3.9/1.13 = $93.45
