21:14 mis.nuigalway.ie 3 At year-end 2015, the City of London expected Next plc's dividends would grow at 7% for 3 years, after which growth would fall to a long-term rate of 3%. Analysts also projected a required rate of retum of 9.5% for the UK equity market and that the UK T-Bill rate would be 1.5% and Next had a beta of 0.85. The following financial data for Next and the FTSE100 index are given: Next pic Selected Financial Data Year Ending December 31, 2015 Earnings per share Dividends per share Other Data on Next Common shares outstanding (M) 0.27 0.14 7200 3.20 Closing share price FTSE 100 Index Closing value (price) 4007 P/E ratio (average) 14.29 (a) As an equity analyst, suppose that you decide to use the following two- stage dividend growth model: Explain the logic behind the above equation to calculate Next's share price. Using the data in the table and the above formula calculate the implied fair price of Next shares using the dividend growth model. (8 marks) (b) Explain the advantages of using a two-stage dividend discount model (DDM) to value a share rather than a constant-growth dividend model. Using a simple numerical example, describe one weakness in all DDMs (5 marks) (c) Define the price-earnings (P/E) ratio. Using the data in the table above, calculate Next's historic price-earnings ratio and the price-earnings ratio relative to the FTSE 100 index as of December 31, 2015. (3 marks) (d) The Prospective P/E ratio uses next year's (forecasted) earnings, E1 For 2016, assume the payout ratio is the same as 2015 and that k is as given in part (a). If the analyst expects earnings per share to grow by 5% in 2016, calculate the prospective P/E ratio for Next. 4 marks) (e) State one advantage and one disadvantage of both the dividend 5 marks) valuation and the price-earnings valuation methods used to value Next shares