Your preliminary market analysis of two stocks has yielded the table below. Estimated dividends and earnings are for the next year and are expected to grow at a constant rate. The ratio of dividend payouts relative to earnings is expected to remain constant over time. The risk-free rate is 5% and the market risk premium is 5%. Apple Stock Orange Stock Return on New Investments, ROI 14% 12% Beta, 1.2 1.4 Estimated earnings per share for next year, E1 $2.00 $1.50 Estimated dividends per share for next year, D1 $1.00 $1.00

a. What is the intrinsic value of each stock using a constant-growth dividend discount model?

b. How should executives in the two companies adjust the dividend distribution policies to maximize shareholder value? Briefly discuss whether the two companies should increase or lower the dividend payout ratios.