AG, an investment firm requires its analysts to use a two-stage dividend discount model and the CAPM to value stocks. Using this approach, AG has valued XYZ Inc. at $63 per share. Now AG must value ABD Inc.

Calculate the required rate of return for ABD, Inc. by using the information below:

XYZ ABD

Beta 1.35 1.15

Market Price $45 $30

Intrinsic value $63 ?

Risk-free rate 4.50%

Expected market return 14.50%

AG estimates 12% growth rate for ABDs EPS and dividends per share for the first three years, and 9% thereafter. ABDs dividends per share in the most recent year were $1.72. Using the two-stage dividend discount model estimate the intrinsic value of ABD.

Recommend ABD or XYZ stock for purchase by comparing each firms intrinsic value with current market price.