Reference no: EM132596263

Question - 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. Kimberly-Clark had debt outstanding of $1.6 billion and intends to maintain its current financing mix (of debt and equity) to finance future investment needs. The firm is in a steady state, and earnings are expected to grow 7% a year. The stock had a beta of 1.05 (the treasury bond rate is 6.25%).

a. Estimate the value per share, using the Dividend Discount Model.

b. Estimate the value per share, using the Free Cash flow to Equity 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?