Janet Ludlow’s firm requires all its analysts to use a two-stage DDM and the CAP
ID: 2714136 • Letter: J
Question
Janet Ludlow’s firm requires all its analysts to use a two-stage DDM and the CAPM to value stocks. Using these measures, Ludlow has valued QuickBrush Company at $63 per share. She now must value SmileWhite Corporation.
a. Calculate the required rate of return for SmileWhite using the information in the following table:
December 2010
Note: Risk-free rate = 4%; expected market return = 13.5%.
Instruction: enter your answer as a percentage rounded to 1 decimal place.
Required rate of return %
b. Ludlow estimates the following EPS and dividend growth rate for SmileWhite:
Estimate the intrinsic value of SmileWhite in December 2010 using the table above and the two-stage DDM. Dividends per share in 2010 were $1.
Instruction: enter your answer as a decimal number rounded to 2 decimal places.
Year Dividends
2010 $1.00
2011 $
2012 $
2013 $
2014 $
Intrinsic stock value in 2013: $.
Intrinsic stock value in 2010: $.
Quick Brush SmileWhite Beta 1.35 1.25 Market Price $45.00 $28 Intrinsic Value $63.00 ?Explanation / Answer
a. Calculate the required rate of return for SmileWhite using the information in the following table: December 2010 Quick Brush SmileWhite Beta 1.35 1.25 Market Price $45.00 $28 Intrinsic Value $63.00 $35.00 Note: Risk-free rate = 4%; expected market return = 13.5%. Given the beta, risk free rate and expected market return, the Required rate of return for the stock is : Instruction: enter your answer as a percentage rounded to 1 decimal place. Required rate of return % 15.90% b. Ludlow estimates the following EPS and dividend growth rate for SmileWhite: First three years: 14% per year Years thereafter: 12% per year Estimate the intrinsic value of SmileWhite in December 2010 using the table above and the two-stage DDM. Dividends per share in 2010 were $1. Instruction: enter your answer as a decimal number rounded to 2 decimal places. Year Dividends 2010 $1.00 2011 $ 1.14 1.14 2012 $ 1.30 1.2996 2013 $ 1.48 1.481544 2014 $ 1.66 1.659329 Intrinsic stock value in 2013: $. 51.85 (25 X 1.14 ^3) Intrinsic stock value in 2010: $. 35.00
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