Critically evaluate the use of the Dividend Discount Model in valuing the shares of Firm A, and explain which alternative methods may be more appropriate.

Words: 142
Pages: 1
Subject: Uncategorized

Question
Assume today is 31 December 2021. Firm A, a commodity producer, is expected to adopt the
following payout policy for the next 4 years:
Year 2022 2023 2024 2025
Dividends ($ m) 9 12 5 0

The estimated net profit after tax is $50 million for the year 2025. The company has no
preference share financing and does not plan to do so forthe next 4 years. The expected
price-earnings ratio by the end of year 2025 is 15 times. Shareholders of Firm A require a return of 10 percent for shares in this risk class.

Required
a. Compute the intrinsic value of Firm As common shares.

b. Critically evaluate the use of the Dividend Discount Model in valuing the shares of Firm A, and explain which alternative methods may be more appropriate.

Note: To show all workings with accompanying explanations.
Word count requirement: 800 (actual wordcount to be stated on the cover page of the assignment).

Minimum number of references: 2.

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