Janet Ludlow’s firm requires all its analysts to use a two-stage DDM and the CAP
ID: 2792700 • 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 Quick Brush 1.35 $45.00 $63.00 SmileWhite Beta Market Price Intrinsic Value S28 2 Note: Risk-free rate = 3%; expected market return = 15% 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: First three years: 114% per year Years thereafter: 112% 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 YeaDividends 2010 $1.00 2011S 2012 S 2013 S 2014 S Intrinsic stock value in 2013: $ Intrinsic stock value in 2010: $Explanation / Answer
quick brush
required rate of return
risk free rate+(market return-risk free rate)*beta
3+(15-3)*1.35
19.2
Smilewhite
required rate of return
risk free rate+(market return-risk free rate)*beta
3+(15-3)*1.2
17.4
Year
Expected dividend = current dividend*(1+r)^n
2010
1
2011
1.14
2012
1.2996
2013
1.481544
2014
1.659329
value of stock in 2013
expected dividend 2014/(required return-growth rate)
1.659329/(17.4%-12%)
30.72831
Year
Expected dividend
present value of cash flow = cash flow/(1+r)^n r= 17.4%
2011
1.14
0.971039
2012
1.2996
0.942917
2013
1.481544
0.915609
2013
30.72831
18.99041
intrinsic value of share in 2010
21.81998
quick brush
required rate of return
risk free rate+(market return-risk free rate)*beta
3+(15-3)*1.35
19.2
Smilewhite
required rate of return
risk free rate+(market return-risk free rate)*beta
3+(15-3)*1.2
17.4
Year
Expected dividend = current dividend*(1+r)^n
2010
1
2011
1.14
2012
1.2996
2013
1.481544
2014
1.659329
value of stock in 2013
expected dividend 2014/(required return-growth rate)
1.659329/(17.4%-12%)
30.72831
Year
Expected dividend
present value of cash flow = cash flow/(1+r)^n r= 17.4%
2011
1.14
0.971039
2012
1.2996
0.942917
2013
1.481544
0.915609
2013
30.72831
18.99041
intrinsic value of share in 2010
21.81998
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