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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 marks
At yearend the City of London expected BAEs plcs dividends would grow at for years, after which growth would fall to a longterm rate of Analysts also projected a required rate of return of for the UK equity market, a UK TBill rate of and that BAEs beta was
The following financial data for BAE and the FTSE index are given:
BAE plc Selected Financial Data Year Ending December Earnings per share
Dividends per share
Other Data on BP
Common shares outstanding M
Closing share price
FTSE Index
Closing value price
PE ratio average
a As an equity analyst, suppose that you decide to use the following twostage 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. marks
b Explain the advantages of using a twostage dividend discount model DDM to value a share rather than a constantgrowth dividend model. Using a simple numerical example, describe one weakness in all DDMs marks
c Define the priceearnings PE ratio. Using the data in the table above, calculate BAEs historic priceearnings ratio and the priceearnings ratio relative to the FTSE index as of December
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