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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
Dividend (M)
9
12
15
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 for the 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 A's 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.
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