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Stellar Baking Company in Australia has a trailing P/E of 14. Analysts predict that Stellars dividends will continue to grow at its recent rate of 4.5 percent per year into the indefinite future. Given a current dividend and EPS of A$0.7 per share and A$2.00 per share, respectively, and a required rate of return on equity of 8 percent, determine whether Stellar Baking Company is undervalued, fairly valued, or overvalued.

Select one:

a. Overvalued

b. Undervalued

c. Fairly valued

Mohan Gupta is the portfolio manager of an India-based equity fund. He is analyzing the value of Tata Chemicals Ltd. (Bombay Stock Exchange: TATACHEM). Tata Chemicals is Indias leading manufacturer of inorganic chemicals, and also manufactures fertilizers and food additives. Gupta has concluded that the DDM is appropriate to value Tata Chemicals. During the last five years (fiscal year ending 31 March 2004 to fiscal year ending 31 March 2008), the company has paid dividends per share of Rs. 5.50, 6.50, 7.00, 8.00, and 9.00, respectively. These dividends suggest an average annual growth rate in DPS of just above 13 percent. Gupta has decided to use a three-stage DDM with a linearly declining growth rate in Stage 2. He considers Tata Chemicals to be an average growth company, and estimates Stage 1 (the growth stage) to be 6 years and Stage 2 (the transition stage) to be 10 years. He estimates the growth rate to be 14 percent in Stage 1 and 10 percent in Stage 3. Gupta has estimated the required return on equity for Tata Chemicals to be 16 percent. The current value of the stock is:

Select one:

a. 196.51

b. 206.51

c. 216.51

d. 226.51

The following information relates to questions 13-14: You are analyzing the stock of Ansell Limited (Australian Stock Exchange: ANN), a healthcare company, as of late June 2008. The stock price is A$9.74. The companys dividend per share for the fiscal year ending 30 June 2008 was A$0.27. You expect the dividend to increase by 10 percent for the next three years and then increase by 8 percent per year forever. You estimate the required return on equity of Ansell Limited to be 12 percent. Question: The value of ANN using a two-stage dividend discount model is:

Select one:

a. 7.69

b. 8.69

c. 9.69

d. 10.69

ANN is

Select one:

a. Undervalued

b. Fairly valued

c. Overvalued

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