Janet Ludlows firm requires all its analysts to use a two-stage dividend discount model (DDM) and the

Janet Ludlow’s firm requires all its analysts to use a two-stage dividend discount model (DDM) and the capital asset pricing model (CAPM) to value stocks. Using the CAPM and DDM, Ludlow has valued QuickBrush Company at $63 per share. She now must value SmileWhite Corporation.

a. Calculate the required rate of return for SmileWhite by using the information in the following table:

b. Ludlow estimates the following EPS and dividend growth rates for SmileWhite:
First 3 years .......12% per year
Years thereafter ....9% per year
Estimate the intrinsic value of SmileWhite by using the table above, and the two-stage DDM. Dividends per share in the most recent year were $1.72.
c. Recommend QuickBrush or SmileWhite stock for purchase by comparing each company’s intrinsic value with its current market price.
d. Describe one strength of the two-stage DDM in comparison with the constant-growth DDM. Describe one weakness inherent in allDDMs.

Transcribed Image Text:

QuickBrush SmileWhite 1.15 530.00 Beta Market price Intrinsic value Notes Risk-free rate Expected market returr 1.35 $45.00 $63.00 4.50% 14.50%