Security Analyst A thinks the Collins Corporation is worth 14 times current earnings. Security Analyst B has a different approach. He assumes that 45 percent of earnings (per share) will be paid out in dividends and the stock should provide a 4 percent current dividend yield. Assume total earnings are $12 million and that 5 million shares are outstanding.
a. Compute the value of the stock based on Security Analyst A’s approach.
b. Compute the value of the stock based on Security Analyst B’s approach.
c. Security Analyst C uses the constant dividend valuation model approach presented in Chapter 7 as Formula 7–5 on page 168. She uses Security Analyst B’s assumption about dividends (per share) and assigns a growth rate, g, of 9 percent and a required rate of return (Ke) of 12 percent. Is her value higher or lower than that of the other security analysts?