Find the value of g used in the DDM model using two approaches.

First, calculate g by using the accounting relationship g = ROE times the retention

rate. Calculate a value for g for each of the last 3 years by multiplying the ROE by the

retention rate and then take an average of the 3 years.

6. Second, estimate the 5 and 10-year historic growth rate in earnings. Alternatively, using a

regression approach, regress the ln (EPS) (y variable) versus a time variable using 5 to 10

years of annual data. The coefficient on the time variable is an estimate of the growth rate

(g). Thus, the regression equation is given by:

Ln(EPS) = a + b (time) where the value of b = g or the growth rate in earnings/dividends

and Ln is the natural log.

Use the regression procedure found in Excel to estimate the equation. The time variable will

take on values of 1 through 5 for 5 years of data and 1 through 10 for 10 years of data. Using

more data observations will give you better statistical results.

Compare the 5-year and 10-year growth rates to the growth rate calculated using the

accounting method.

7. Estimate the intrinsic value (price) for the stock using the 1) dividend discount model (DDM)

approach assuming constant growth and the 2) P/E multiplier approach. Make a buy or sell or

hold recommendation.

P/E ratio x estimated earnings = estimated price

Earnings estimate = current EPS times (1+g) use the P/E ratio for the selected companys

industry The company here is Ferrari.