QUESTION

**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**.

TUTORIAL PREVIEW

Using the Dividend Discount Model in Valuation: The Case of PepsiCo

Dated: 15th May'18 09:59 PM

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