Question
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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