Janet Ludlow's firm requires all its analysts to use a two-stage DDM and the CAPM to value stocks. Using these measures, Ludlow has valued QuickBrush Company at $63 per share. She now must value SmileWhite Corporation.

Calculate the required rate of return for SmileWhite using the information in the following table:

	December 2012
	QuickBrush	SmileWhite
Beta	1.35	1.25
Market price	$45.00	$40.00
Intrinsic value	$63.00	?
Note: Risk-free rate = 4.50%; expected market return = 14.50%

Ludlow estimates the following EPS and dividend growth rates for SmileWhite:

First three years:	15% per year
Years thereafter:	8% per year

Estimate the intrinsic value of SmileWhite using the table above, and the two-stage DDM. Dividends per share in 2012 were $2.50.

Recommend QuickBrush or SmileWhite stock for purchase by comparing each company's intrinsic value with its current market price.

Describe one strength of the two-stage DDM in comparison with the constant growth DDM. Describe one weakness inherent in all DDMs.

I have completed some of the calculations. I do not know if I am on the right track. The spreadsheet is attached.

Janet Ludlow's firm requires all its analysts to use a two-stage DDM and the CAPM to value stocks. Using these $63 per share. She now must value SmileWhite Corporation. a. Calculate the required rate of return for SmileWhite using the information in the following table: 12/1/2012 QuickBrush Beta Market price Intrinsic value 1.35 $45.00 $63.00 Note: Risk-free rate = 4.50%; expected market return = 14.50% 4.50% Risk Free Rate (Rf) Expected Market Return (Rm) Risk Primium Beta 14.50% 10.00% 1.25 Cost of equity(Re) = Rf + Beta*(Rm - Rf) 17.00% b. Ludlow estimates the following EPS and dividend growth rates for SmileWhite: First three years: Years thereafter: Estimate the intrinsic value of SmileWhite using the table above, and the two-stage DDM. Dividends per share in 2012 were $2.50. Dividends Per share 2012 Growth First 3 years Growth after three years (Constant Growth Rate) Growth Periods Year Year 2.5 15.00% 8.00% 4 Dividends 2012 $ 2013 $ 2014 $ 2015 $ 2016 $ 2.50 2.88 3.31 3.80 4.11 PV of Dividends 2013 $ 2014 $ 2.46 2.42 Total Price (Terminal Value) PV OF Terminal Value PV of Stock 2015 $ $ 2.06 6.94 $ $ $ 45.67 24.37 31.31 e DDM and the CAPM to value stocks. Using these measures, Ludlow has valued QuickBrush Company at White using the information in the following table: 12/1/2012 SmileWhite 1.25 $40.00 ? Risk Primium (14.50%4.50%) Required Rate of Return and dividend growth rates for SmileWhite: Per Year 15% 8% he table above, and the two-stage DDM