The exam contains two questions. You must answer both questions, using a separate document for each question. The weighting is noted against the question.
Question 1
Sell side analyst Jason Parker is valuing XYZ plc and has made the following assumptions: Book value per share (BPS) is estimated at £9.62 on December 31, 2020. Earnings per share (EPS) will be 22% of the beginning BPS for the next five years, and cash dividends paid will be 30% of EPS. At the end of the five-year period, the market price per share will be three times the book value per share. The beta for this stock is 0.6, the risk-free rate is 5%, and the equity risk premium is 5.5% percent. On December 31, 2020 the stock was trading at £35. Required: Estimate the intrinsic value per share of XYZ plc stock using two valuation models: the residual income valuation AND the dividend discount model. Assume December 31, 2020 as the date of your valuation. Provide your commentary about how the two valuations compare, and state your investment recommendation. You must show your workings by preparing a table that shows the beginning and ending BPS, EPS, DPS and residual earnings for the five-year period, as well as any other relevant inputs. (65%)
Question 2
Critically discuss the conceptual and practical advantages and limitations of the Dividend Discount Model and the Residual Income Valuation Model. In your answer you are expected to demonstrate familiarity with relevant literature. Your answer to this question should not exceed 600 words. (35%)
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