Discuss weaknesses of this dividend discount model

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HKBU's investment club wants to buy the stock of either TechSoft Inc. or A&E Corp. In this connection, HKBU 's investment club prepared the following table. You have been asked to help them interpret the data, based on your forecast for a healthy economy and a strong stock market over the next 12 months.

TechSoft Inc. A&E Corp. S&P 500 Index
Current price $30 $32
Industry Computer software Capital goods
P/E ratio (current) 25 14 16
P/E ratio
(5-year average) 27 16 16
P/B ratio (current) 10 3 3
P/B ratio
(5-year average) 12 4 2
Beta 1.5 1.1 1.0
Dividend yield 0.3% 2.7% 2.8%

a. Using a constant-growth dividend discount model, HKBU's investment club estimated the value TechSoft to be $28 per share and the value of A&E Corp. to be $34 per share. Briefly discuss weaknesses of this dividend discount model and explain why this model may be less suitable for valuing TechSoft than for valuing A&E Corp.

b. Recommend and justify a more appropriate dividend discount model for valuing- TechSoft's common stock.

Reference no: EM132699452

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