1) What is the purpose of the dividend discount model?
2) What are the advantages and the disadvantages of the method?
3) What are the zero-growth, the constant-growth, and the supernormal growth models under the dividend discount model? How do we proceed with each of them?
4) Which model would give a higher estimated value: the zero-growth model or the constant-growth model? With which model would we have a higher chance of giving a “buy” recommendation for the stock?
5) Estimate the annual growth rate in PepsiCo’s dividends over the 2008-2013 period using the data given in the case. Calculate both the arithmetic average and the geometric average annual growth rates in PepsiCo’s dividends over the period, and then take the average of those two measures as your best estimate for PepsiCo’s expected growth over the next 4 years (i.e. 2014-2017).
6) What are the ways to estimate the cost of common stock (i.e. or the required return on common stock)? We can use the dividend growth model formula P=D1/(r-g) to estimate the cost of common stock (r). We know PepsiCo’s actual closing stock price on 12/31/2013. For, g, we can use the number that we will find in question #5. For D1, again we can use the growth number that we will find in #5.
7) Estimate the value of PepsiCo shares using the following models: The zero-growth model, The constant-growth model, The supernormal growth model
8) Based on each model, what would be our investment advice for potential investors in PepsiCo shares?
9. If we want to go ahead with the supernormal growth model, what would be our decision? Is the stock a good buy?” Mary Ann concluded.
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