Janet Ludlow firm requires all its analysts to use a two-stage dividend discount model (DDM) and the capital asset pricing model (CAPM) to value stocks. Using the CAPM and DDM, Ludlow has valued QuickBrush Company at $63 per share. She now must value SmileWhite Corporation. a. Calculate the required rate of return for SmileWhite by using the information in the following table: QuickBrush SmileWhite Beta 1.35 1.15 Market price $45.00 $30.00 Intrinsic value $63.00? Notes: Risk-free rate 4.50% Expected market return 14.50% b. Ludlow estimates the following EPS and dividend growth rates for SmileWhite: First 3 years 12% per year Years thereafter 9% per year Estimate the intrinsic value of SmileWhite by using the table above, and the two-stage DDM. Dividends per share in the most recent year were $1.72. c. Recommend QuickBrush or SmileWhite stock for purchase by comparing each company?s intrinsic value with its current market price. d. Describe one strength of the two-stage DDM in comparison with the constant-growth DDM. Describe one weakness inherent in all DDMs.
Describe one strength of the two-stage DDM in comparison with the constant-growth DDM.
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