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Janet Ludlows firm requires all its analysts to use a two-stage DDM and the CAPM to value stocks. Using these measures, Ludlow has valued QuickBrush

Janet Ludlows 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.

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

December 2010

Quick Brush SmileWhite
Beta 1.35 1.2
Market Price $45.00 $28
Intrinsic Value $63.00 ?

Note: Risk-free rate = 3.5%; expected market return = 15%.

Instruction: enter your answer as a percentage rounded to 1 decimal place.

Required rate of return %

17.3

b. Ludlow estimates the following EPS and dividend growth rate for SmileWhite:

First three years: 14% per year
Years thereafter: 13% per year

Estimate the intrinsic value of SmileWhite in December 2010 using the table above and the two-stage DDM. Dividends per share in 2010 were $1.

Instruction: enter your answer as a decimal number rounded to 2 decimal places.

Year Dividends

2010 $1.00

2011 $1.14

2012 $1.30

2013 $1.48

2014 $1.67

Intrinsic stock value in 2013: $. ??????

Intrinsic stock value in 2010: $. ??????

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