Your preliminary market analysis of two stocks has yielded the table below The expected rate of return on the market is equal to 10 and the risk free rate is 2 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 aWatch bWatch Return on New Investments, ROI 14 12 Systematic Risk, b 1 5 1 Estimated earnings per share, E 1 $5 00 $4 00 Dividend payout ratio, DPR 60 60 Current market price per share, P 0 $40 00 $42 00 a What is the intrinsic value of each of the two stocks using a constant growth dividend discount model Should you buy or sell the two stocks b The industry including aWatch and bWatch has an average forward looking price earnings ratio (P 0 E 1 ) of 9 25 What is the intrinsic value of the two stocks using the multiplier method Should you buy or sell the two stocks c How should executives in the two companies adjust the dividend distribution policy to maximize shareholder value Briefly discuss whether the two companies should increase or lower the dividend payout ratios

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Posted on Aug 01, 2024

Your preliminary market analysis of two stocks has yielded the table below. The expected rate of return on the market is equal to 10% and

Your preliminary market analysis of two stocks has yielded the table below. The expected rate of return on the market is equal to 10% and the risk-free rate is 2%. 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.

	aWatch	bWatch
Return on New Investments, ROI	14%	12%
Systematic Risk, b	1.5	1
Estimated earnings per share, E₁	$5.00	$4.00
Dividend payout ratio, DPR	60%	60%
Current market price per share, P₀	$40.00	$42.00

a. What is the intrinsic value of each of the two stocks using a constant-growth dividend discount model? Should you buy or sell the two stocks?

b. The industry including aWatch and bWatch has an average forward-looking price-earnings ratio (P₀/E₁) of 9.25. What is the intrinsic value of the two stocks using the multiplier method? Should you buy or sell the two stocks?

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