Response to the following problem:
Larry, Moe and Curley are brothers. They're all serious investors, but each has a different approach to valuing shares. Larry, the oldest, likes to use a one-year holding period to value shares. Moe, the middle brother, likes to use multi-year holding periods. Curley, the youngest of the three, prefers the dividend valuation model.
As it turns out, right now, all three of them are looking at the same share-Australian Home Care Products (AHCP). The company has been listed on the ASX for over 20 years and is widely regarded as a mature, rock-solid, dividend-paying share. The brothers have gathered the following information about AHCP's shares:
Current dividend (D0) = $2.50/share
Expected growth rate (g) = 9.0%
Required rate of return (k) = 12.0%
All three of them agree that these variables are appropriate, and they will use them in valuing the share. Larry and Moe intend to use the D&E approach; Curley is going to use the constantgrowth DVM. Larry will use a one-year holding period; he estimates that with a 9% growth rate, the price of the share will increase to $98.80 by the end of the year. Moe will use a three-year holding period; with the same 9% growth rate, he projects the future price of the share will be $117.40 by the end of his investment horizon. Curley will use the constant-growth DVM, so his holding period isn't needed.
a. Use the information provided above to value the shares first for Larry, then for Moe, then for Curley.
b. Comment on your findings. Which approach seems to make the most sense?