CFA 8. Janet Ludlow's firm requires all its analysts to use a two-stage dividend discount model (DDM) and the capital asset pricing model (CAPM) to value stocks. Using the CAPM and DDM, Ludlow has valued QuickBrush Company at $63 per share. She now must value Smile White Corporation.

a. Calculate the required rate of return for Smile White by using the information in the following table:

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

Estimate the intrinsic value of Smile White by using the table above and the two-stage DDM. Dividends per share in the most recent year were $1.72.

c. Recommend QuickBrush or Smile White 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.

\begin{tabular}{lcc} & QuickBrush & SmileWhite \\ \cline { 2 - 3 } Beta & 1.35 & 1.15 \\ Market price & $45.00 & $30.00 \\ Intrinsic value & $63.00 & ? \\ Notes: & & \\ Risk-free rate & 4.50% & \\ Expected market return & 14.50% & \end{tabular} First 3 years Years thereafter 12% per year 9% per year