a. Mulroney recalled from her CFA studies that the constant-growth discounted dividend model was one way to arrive at a valuation for a company€™s common stock. She collected current dividend and stock price data for Eastover and Southampton, shown in Table E. Using 11% as the required rate of return (i.e., discount rate) and a projected growth rate of 8%, compute a constant-growth DDM value for Eastover€™s stock and compare the computed value for Eastover to its stock price indicated in Table F.
b. Mulroney€™s supervisor commented that a two-stage DDM may be more appropriate for companies such as Eastover and Southampton. Mulroney believes that Eastover and
Southampton could grow more rapidly over the next 3 years and then settle in at a lower but sustainable rate of growth beyond 2014. Her estimates are indicated in Table G. Using 11% as the required rate of return, compute the two-stage DDM value of Eastover€™s stock and compare that value to its stock price indicated in Table 19.
c. Discuss advantages and disadvantages of using a constant-growth DDM. Briefly discuss how the two-stage DDM improves upon the constant-growth DDM.

Eastover Company (EO) is a large, diversified forest products company. Approximately 75% of its sales are from paper and forest products, with the remainder from financial services and real estate. The company owns 5.6 million acres of timberland, which is carried at very low historical cost on the balance sheet.
Peggy Mulroney, CFA, is an analyst at the investment counseling firm of Centurion Investments.
She is assigned the task of assessing the outlook for Eastover, which is being considered for purchase, and comparing it to another forest products company in Centurion€™s portfolios, Southampton Corporation (SHC). SHC is a major producer of lumber products in the United States. Building products, primarily lumber and plywood, account for 89% of SHC€™s sales, with pulp accounting for the remainder. SHC owns 1.4 million acres of timberland, which is also carried at historical cost on the balance sheet. In SHC€™s case, however, that cost is not as far below current market as Eastover€™s.
Mulroney began her examination of Eastover and Southampton by looking at the five components of return on equity (ROE) for each company. For her analysis, Mulroney elected to define equity as total shareholders€™ equity, including preferred stock. She also elected to use year-end data rather than averages for the balance sheetitems.

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Table F Current Share Price Current Dividends Per Share 2012 EPS Estimate Current Book Value Per Share Eastover Southampton S&P 500 $ 28 S 1.20 $ 1.60 17.32 32.21 639.32 48 1.08 3.00 1660 48.00 82.16 Table G Next 3 Years (2012, 2013, 2014) 12% 13% Growth Beyond 2014 896 7% Eastover