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You are planning to invest in a stock. Your friend suggests two stocks, Top Tree and BSS, for you to consider. To help you
You are planning to invest in a stock. Your friend suggests two stocks, Top Tree and BSS, for you to consider. To help you make the decision, you have gathered the relevant information for both stocks. 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 Top Tree RM30 Technology 25 27 10 12 1.5 0.30% BSS RM32 Consumer 14 16 3 4 1.1 2.70% FBMKLCI 16 16 3 2 1.0 2.80% In addition to relative valuations, you also use a constant growth dividend discount model to find the stocks' intrinsic value. It is estimated that the value of Top Tree to be RM28 per share and the value of BSS be RM34 per share. However, she thinks it is not appropriate to use a constant growth dividend discount model to value Top Tree stock. Do you agree with her? Briefly discuss weaknesses of this dividend discount model and explain why this model may be less suitable for valuing Top Tree than for valuing BSS.
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