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QUESTION 1 Mathews company requires all its analysts to use a two-stage DDM and the...

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Finance

QUESTION 1

Mathews company requires all its analysts to use a two-stage DDM and the CAPM to value stocks. Using these models, Mathew has valued Nokia Company at $ 63 per share. She now must value Motorola Corporation.

Table 1: Valuation Information: December 2016

Nokia

Motorola

Beta

1.35

1.15

Market Price

$45

$30

Intrinsic Value

$63

Risk free rate

4.5%

Expected Market return

14.5%

Mathew estimates the following EPS and dividend growth rates for Motorola

First three years: 12% per year

Years thereafter: 9% per year

The 2016 dividend per share is $ 1.72.

  1. Calculate the required rate of return for Smile White using the information in Table 1 and the CAPM. Show your work.
  2. Estimate the intrinsic value of Smile White using the data above and the two-stage DDM. Show your work.
  3. Recommend Quick Brush or Smile White stock for purchase by comparing each companys intrinsic value with its current market price. Show your working.
  4. Describe one strength of the two-stage DDM in comparison with the constant growth DDM. Describe one weakness inherent in all DDMs.

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