Jack prefers to use a two-stage differential growth DDM (dividend discount model) and the CAPM to...

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Jack prefers to use a two-stage differential growth DDM (dividend discount model) and the CAPM to value stocks. Using these models, Jack has valued AML Company at $63 per share. He is now working on the valuation of BGC, a biotech company. Valuation Information: Dec. 2018 BGC 1.2 $50 ? AML Beta 0.89 Market price $45 Estimated value $63 Jack estimates the following information for BGC. BGC pays dividends on December 1 of each year. It just paid the 2020 dividend $1.7 per share. In the next four years (2021- 2024), the dividend growth rate is 20% per year; then it will grow at 9% year forever. Risk-free rate is 4% and the expected return on the market portfolio is 14%. (a) Calculate the required rate of return for BGC using information given above. (b) What would be the estimated value of BGC according to Jack's calculation? (c) Another analyst, Jane, tells Jack that she believes that BGC can keep finding prof- itable investment opportunities and prefers to use the constant growth model. Based on accounting statements, she assumes that the return on retained earnings is 20% and each year BGC will pay out 30% of its earnings to the shareholders in dividends. According to Jane's calculation, what is the growth rate of BGC's dividends? What would be Jane's estimated value of BGC? (d) Based on his estimation of the fundamental value, should Jack recommend to sell or to buy BGC? How about Jane's recommendation for BGC? Whose analysis of BGC (Jack or Jane's) do you feel is more accurate? Explain. Jack prefers to use a two-stage differential growth DDM (dividend discount model) and the CAPM to value stocks. Using these models, Jack has valued AML Company at $63 per share. He is now working on the valuation of BGC, a biotech company. Valuation Information: Dec. 2018 BGC 1.2 $50 ? AML Beta 0.89 Market price $45 Estimated value $63 Jack estimates the following information for BGC. BGC pays dividends on December 1 of each year. It just paid the 2020 dividend $1.7 per share. In the next four years (2021- 2024), the dividend growth rate is 20% per year; then it will grow at 9% year forever. Risk-free rate is 4% and the expected return on the market portfolio is 14%. (a) Calculate the required rate of return for BGC using information given above. (b) What would be the estimated value of BGC according to Jack's calculation? (c) Another analyst, Jane, tells Jack that she believes that BGC can keep finding prof- itable investment opportunities and prefers to use the constant growth model. Based on accounting statements, she assumes that the return on retained earnings is 20% and each year BGC will pay out 30% of its earnings to the shareholders in dividends. According to Jane's calculation, what is the growth rate of BGC's dividends? What would be Jane's estimated value of BGC? (d) Based on his estimation of the fundamental value, should Jack recommend to sell or to buy BGC? How about Jane's recommendation for BGC? Whose analysis of BGC (Jack or Jane's) do you feel is more accurate? Explain.

Answer rating: 100% (QA)

a Calculate the required rate of return for BGC using the CAPM formula CAPM Riskfree rate Beta Expected market return Riskfree rate Given Riskfree rat... View the full answer