Q2) HKBU's investment club wants to buy the stock of either TechSoft Inc. or A&E Corp. In this connection, HKBU 's investment club prepared the following table. You have been asked to help them interpret the data, based on your forecast for a healthy economy and a strong stock market over the next 12 months.

TechSoft Inc.A&E Corp. S&P 500 Index

Current price$30$32

IndustryComputer softwareCapital goods

P/E ratio (current)2514 16

P/E ratio

(5-year average)2716 16

P/B ratio (current)103 3

P/B ratio

(5-year average)124 2

Beta1.51.1 1.0

Dividend yield0.3% 2.7%2.8%

a.Using a constant-growth dividend discount model, HKBU's investment club estimated the value TechSoft to be $28 per share and the value of A&E Corp. to be $34 per share. Briefly discuss weaknesses of this dividend discount model and explain why this model may be less suitable for valuing TechSoft than for valuing A&E Corp.

b.Recommend and justify a more appropriate dividend discount model for valuing^- TechSoft's common stock.