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Phoebe Black's investment club wants to buy the stock of either New Soft Inc, or Capital Corp. In this connection, Black prepared the following table. You have been asked to help her interpret the data, based on your forecast for a healthy economy and a strong stock market over the next 12 months. S&P 500 Index Current price Industry P/E ratio (current) P/E ratio (5 year average) Price/book ratio (current) Price/book ratio (5 year average) Beta Dividend yield Newsoft, Inc. $30 Computer software 25 27 10 12 1.5 0,3096 Capital Corp 532 Capital goods 14 16 3 4 1.1 2.7096 16 16 3 2 1 2.80% a. Newsoft's share have higher price-earnings (P/E) and price-book (P/B) ratios than those of Capital Corp. (The price-book ratios is the ratios o market price to book value.) Briefly discuss why the disparity in ratios may not indicate that NewSoft's share are overvalued relative to the shares of Capital Corp. Answer the question in terms of the two ratios, and assume that there have been no extraordinary events affecting either company. b. Using a constant-growth dividend discount model, Black estimated the value of NewSoft to be $28 per share and the value of Capital Corp, to be $34 per share. Briefly discuss weakness of this dividend discount model, and explain why this mode may be less suitable for valuing NewSoft than for valuing Capital Corp. c. Recommend and justify a more appropriate dividend discount model for valuing New Soft's common stock. 2022 Calculating the Free cash flow to equity 2020 2021 Replicate the year 2021, and extend the calculation to 2022 FCFF = EBIT (1-T) + Depr - ANWC-CAPEX FCFE = FCFF - Interest * (1-2) + increase in net debt 69 0.28 16 EBIT Tax rate (1) Depr Interest expense NWC ANWC CAPEX net debt Afnet debt) 0 86 0.30 20 0 144 18 34 0 ?? ?? ?? ?? ?? 126 A: : : : : : : :