Extra Example on Stock Valuation

Glamour Corporation is expected to generate total earnings of $2.4 million at the end of the year. Glamour Corp. traditionally pays out 25% as common dividends and has 120,000 shares outstanding. The required market rate of return on Glamour Corp. is 14%, whereas historically their return on equity (ROE) has averaged 18%.

Value Corporation is expected to generate total earnings of $2.8 million at the end of the year and has 140,000 shares outstanding. Value Corp. retains 5% of its earnings and has a ROE of 10% and a required market rate of return of 12% respectively.

Both firm reinvest their contributions to retained earnings annually at their respective ROE's. Assume ROE is a reliable estimate for return on retained earnings.

Questions:

(1) Calculate the current stock prices for both Glamour and Value using the dividend growth model.

(2) Calculate the current stock prices for both Glamour and Value using the NPVGO model.


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