Betty Black investment club wants to buy the stock of either New Soft Inc. or Capital Corp. In this connection, Black has prepared the following table. You have been asked to help her interpret the data, based on your forecast for a healthy economy and a strong market over the next 12 months.

New Soft Inc. Capital Corp. S&P 500 Index

Current Price $30 $32 n/a

Industry Computer Software Capital Goods n/a

P/E ratio (current) 25x 14x 16x

P/E ratio (5-yr avg) 27x 16x 16x

P/B ratio (current) 10x 3x 3x

P/B ratio (5-yr avg) 12x 4x 2x

Beta 1.5 1.1 1.0

Dividend Yield 0.3% 2.7% 2.8%

a.New Soft's shares have higher price/earnings (P/E) and price/book (P/B) ratios than those of Capital corp. Identify and briefly discuss three reasons why the disparity in ratios may not indicate that New Soft's shares are overvalued relative to the shares of Capital corp. Answer the question in terms of the two ratios, and assume that there have been no extraordinary events affecting either company.

b.using a constant-growth DDM, black estimated the value of Newsoft to be $28 per share and the value of capital corp to be $34 per share. discuss weakness of this DDM and explain why this model may be less suitable for valuing newsoft than for capital corp.

c. recommend and justify a more appropriate dividend model for valuing newsoft's common stock