finance-Janet Ludlow’s firm requires all its analysts to use a two-stage

QUESTION

Assignment – Equity Valuation
Janet Ludlow’s
firm requires all its analysts to use a two-stage DDM and the CAPM to value
stocks. Using these measures, Ludlow has valued QuickBrush Company at $63 per
share. She now must value SmileWhite Corporation.
a.
Calculate the required rate of return for SmileWhite using
the information in the following table:

December 2007

QuickBrush

SmileWhite

Beta

1.35

1.15

Market
price

$45.00

$30.00

Intrinsic
value

$63.00

?

Note:
Risk-free rate = 4.50%; expected market return = 14.50%

b.
Ludlow estimates the following EPS and dividend growth rates
for SmileWhite:

First three
years:

12% per year

Years
thereafter:

9% per year

Estimate the
intrinsic value of SmileWhite using the table above, and the two-stage DDM.
Dividends per share in 2007 were $1.72.
c.Recommend
QuickBrush or SmileWhite stock for purchase by comparing each company’s
intrinsic value with its current market price.

d.Describe one
strength of the two-stage DDM in
comparison with the constant growth DDM. Describe one weakness inherent
in all DDMs.

ANSWER:

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