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Valuation Models ( 2 5 marks ) At year - end 2 0 2 3 , the City of London expected BAE s plc s

Valuation Models (25 marks)
At year-end 2023, the City of London expected BAEs plcs dividends would grow at 6% for 3 years, after which growth would fall to a long-term rate of 3%. Analysts also projected a required rate of return of 7% for the UK equity market, a UK T-Bill rate of 2.0%, and that BAEs beta was 0.90.
The following financial data for BAE and the FTSE100 index are given:
BAE plc Selected Financial Data Year Ending December 31,2023 Earnings per share 0.80
Dividends per share 0.24
Other Data on BP
Common shares outstanding (M)9000
Closing share price 15.00
FTSE 100 Index
Closing value (price)7500
P/E ratio (average)17.90
(a) As an equity analyst, suppose that you decide to use the following two-stage dividend growth model:
Explain the logic behind the above equation to calculate BAEs share price. Using the data in the table and the above formula calculate the implied fair price of BAE shares using the dividend growth model. (10 marks)
(b) Explain the advantages of using a two-stage dividend discount model (DDM) to value a share rather than a constant-growth dividend model. Using a simple numerical example, describe one weakness in all DDMs.(5 marks)
(c) Define the price-earnings (P/E) ratio. Using the data in the table above, calculate BAEs historic price-earnings ratio and the price-earnings ratio relative to the FTSE 100 index as of December 31,2023.

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