Reference no: EM133119461
Dividend Discount Model and FCFE Model
Kimberly-Clark, a household product manufacturer, reported earnings per share of $3.20 in 1993 and paid dividends per share of $1.70 in that year. The firm reported depreciation of $315 million in 1993, and capital expenditures of $475 million. (There were 160 million shares outstanding, trading at $51 per share.) This ratio of capital expenditures to depreciation is expected to be maintained in the long term. The working capital needs are negligible.
KimberlyClark had debt outstanding of $1.6 billion, and intended to maintain its current financing mix (of debt and equity) to finance future investment needs.
The firm was in steady state and earnings were expected to grow 7% a year.
The stock had a beta of 1.05. (The Treasury bond rate was 6.25%, and the risk premium was 5.5%.)
a. Estimate the value per share, using the dividend discount model.
b. Estimate the value per share, using the FCFE model.
c. How would you explain the difference between the two models, and which one would you use as your benchmark for comparison to the market price?
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