Simon is an equity analyst. He proposes to use dividend discount model (DDM) to value the stock of Santa Company. Santa currently pays an annual dividend of $12.25 per share. The stock is currently selling for $201.9 per share. Simon estimates that the dividend will grow at a rate of 10% per year for the next 3 years and then at 5% per year thereafter. Because the growth rates are different in different periods, he plans to work it out in two stages. The market required rate of return is flat at 15% for all tenors.

a) Stage 1: Calculate the price of Santa Company 3 years from now by DDM.

b) Stage 2: Calculate the current price of Santa Company by DDM. Is the stock underpriced, fairly priced or overpriced?

c) What is the weakness of DDM?