Consensus estimates
Year end	December 2018	December 2019	December 2020
Dividend per share (pence)	20	24	28
Earnings per share (pence)	40	50	56

It is now March 2018. The above figures are consensus estimates for a FTSE 250 quoted company which is in a mature sector with stable growth in sales. The shares of the company are currently trading in the market for 10.00 per share. Its beta is 0.9, the risk free rate is 2.0% and market risk premium is 6%.

(a) Given that the consensus forecast for the firms long term dividend growth rate is 7%, estimate the intrinsic value of the firm using the multistage growth DDM model. (6 marks)

(b) Obtain another estimate of the firms intrinsic value using the multistage growth DDM model based on the information that the firms ROE has stabilised at 12%. (7 marks)

(c) Discuss which of the two intrinsic values you obtain in (a) and (b) would be more realistic in practice. (5 marks)

(d) Explain whether the following statements are true, false or uncertain according to the constant growth DDM model.

With all else held constant, a firm will have a higher P/E ratio if its beta is higher. (2 marks)

P/E ratio will tend to be higher when the growth rate of dividends is higher. (2 marks)

P/E ratio will tend to be higher when the plowback or retention ratio is higher. (3 marks)