Susan recalled from her studies that the constant-growth dividend discount model (DDM) was one way to arrive at a valuation for a companys common stock. She collected current dividend and stock price data for the Shazam Corporation.

She planned to use 9 percent as the required rate of return (i.e., discount rate) and a projected growth rate of 4 percent is the constant growth rate.

However, Susans supervisor commented that a multi-stage DDM may be more appropriate for Shazam Corporation because the recent growth rate was very high. Her supervisor helps in setting the assumption for growth rate at 30 percent in year 1, 20 percent in year 2, and 10 percent in year 3. Thereafter, the constant growth rate of 4 percent should be applied.

1. Compute the value of common stock for Shazam Corporation using the original assumption of the single constant growth rate.
2. Compute the value of common stock for Shazam Corporation using the multi-stage model based on the assumptions of Susan supervisor.
3. Compare the value of both methods and discuss why they are different.