Note: The second page complements the table on the first page
ABC 0.17 0.0234 0.045 478.85 XYZ 0.135 Not available. Cannot compute without dividends 0.2 Not available. Cannot compute without dividends Not available. Cannot compute without dividends Not available. Cannot compute without dividends Discount rate (1) Historical growth rate of dividends Sustainable growth rate Fundamental value using dividend growth model with the historical growth rate Fundamental value using the dividend growth model with the sustainable growth rate Fundamental value using residual income growth model with the historical growth rate Fundamental value using the residual income growth model with the sustainable growth rate 561.6 470.68 470.8 123.08 The "stock valuation model" referred to in the questions below relate to the whether the fundamental value is estimated with the dividend growth model or the residual income model, AND whether the growth rate is estimated with the historical growth rate or the sustainable growth rate. These estimates of the fundamental value are in the last four rows of the table above. Suppose the current price of ABC stock is as given in the table above, and the current price of XYZ stock is as given in the table above. 1. Assume dividends will continue to grow at the same rate for ABC stock. a. Explain which stock valuation model(s) you would choose? b. Given the current price, should you buy or sell ABC stock? 2. Suppose ABC has changed its products, and dividends will not grow at the same rate. a. Explain which stock valuation model(s) you would choose? b. Given the current price, should you buy or sell ABC stock? 3. Recall XYZ is a new company. a. Explain which stock valuation model(s) you would choose? b. Given the current price, should you buy or sell XYZ? ABC 0.17 0.0234 0.045 478.85 XYZ 0.135 Not available. Cannot compute without dividends 0.2 Not available. Cannot compute without dividends Not available. Cannot compute without dividends Not available. Cannot compute without dividends Discount rate (1) Historical growth rate of dividends Sustainable growth rate Fundamental value using dividend growth model with the historical growth rate Fundamental value using the dividend growth model with the sustainable growth rate Fundamental value using residual income growth model with the historical growth rate Fundamental value using the residual income growth model with the sustainable growth rate 561.6 470.68 470.8 123.08 The "stock valuation model" referred to in the questions below relate to the whether the fundamental value is estimated with the dividend growth model or the residual income model, AND whether the growth rate is estimated with the historical growth rate or the sustainable growth rate. These estimates of the fundamental value are in the last four rows of the table above. Suppose the current price of ABC stock is as given in the table above, and the current price of XYZ stock is as given in the table above. 1. Assume dividends will continue to grow at the same rate for ABC stock. a. Explain which stock valuation model(s) you would choose? b. Given the current price, should you buy or sell ABC stock? 2. Suppose ABC has changed its products, and dividends will not grow at the same rate. a. Explain which stock valuation model(s) you would choose? b. Given the current price, should you buy or sell ABC stock? 3. Recall XYZ is a new company. a. Explain which stock valuation model(s) you would choose? b. Given the current price, should you buy or sell XYZ
