Share price estimate of CBA and BHP: Access Morningstar DatAnalysis Premium. Obtain the last ten years (2008 to 2017) of dividend payments history for each of the two companies.

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Dividend discount model is a well known model for pricing shares based on the present value of future expected dividends. Use the two-stage variable growth model to estimate the share prices of Commonwealth bank of Australia (CBA) and BHP Billiton (BHP) using real data drawn from the financial database: DatAnalysis Premium.
a) Access Morningstar DatAnalysis Premium. Obtain the last ten years (2008 to 2017) of dividend payments history for each of the two companies. For simplicity, each year’s dividends equal to the sum of the interim dividend and the final dividend. Determine the Australian dollar dividends received by shareholders for each of the past ten years. (3 Marks)

b) Based on the information obtained in part (a) and your own economic analysis, forecast the next 5 year’s expected dividend payments and the annual constant growth rate of dividends in the second stage starting in year 6. Must elaborate the reasons for your forecasts. (8 Marks)

c) Look up the beta of each company from the “Key Data” section under the company’s name in DatAnalysis. Google the current 10 year Australian government bond yield, which will be used as the riskfree rate. Then calculate the required rate of return (discount rate) of equity capital based on the Capital Asset Pricing Model (CAPM). (3 Marks)

d) Calculate the share price for each company based on the “two-stage” variable growth model. Need to show the steps of your calculations. (6 Marks)

e) Compare your results in part (d) with the current share prices of CBA and BHP which can be found on the website: www.asx.com.au. Comment on the differences. Are you ready to trade the stocks based on your own analysis? (4 Marks)

f) What do you think are the most serious methodological problems associated with this model? Outline your argument and carry out a review of relevant financial academic literature and compare and contrast this model with two alternative valuation models (i.e. discounted free-cash model and P/E multiples of comparable companies). Argue your case. (Maximum 800 words for part (f)) (6 Marks)

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