Intrinsic value of Firm A’s common shares.

 

Intrinsic value of Firm A’s common shares.

 

 

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 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.

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

 

 

Sample Solution

ough, is the quantity of migrants from Europe enough to halt the growth in our economy? The UK closing its borders to EU nationals would not affect the immigrants coming from other countries, for example India and China, therefore it would not affect the GDP by far. To support this, BBC news reports the increase in growth in our economy: ‘Latest figures show that the economy grew by 0.5% in the three months after the Brexit vote’ (BBC,2016) proving the effect was positive but less than expected at 0.7%. At this point in time figures may not show the full impact of Brexit on the economy as it is recent, however the ratio of people outside of the EU are still greater than the ones within the EU coming to the UK, making the point valid for argument.

As the economy grows it attracts new bodies. This is because a growing economy offers great and better opportunities such as better jobs, more pay and better standards of living. How does this benefit the economy? The answer is clear, the monopoly effect. The graph shows the relationship between the number of migrants by citizenship compared to the on-going years. Furthermore, as it gets to 2015 it shows that non-EU and EU citizens have migrated to the UK at the same quantity causing Brexit to be less harmful to a variety of benefits migrants provide to the UK economy. Despite this this evidence may be uncertain as they are survey results and cannot be reliant, data shown may not actually show the real affect.

Brexit will cause a reduction in immigration from other European countries, this will lead to a loss of benefits that Britain gain from these migrants. One prime example: Nurses in the UK would decrease if people leave EU, this would result in the increase in spending for recruitment. Causing a deficit to the balance of trade and adding more to the debt the country already obtains. “Nursing leaders warned the government that if lower-earning non-EU workers were to be deported, the shortage of nurses in the UK could worsen and the NHS would have to spend millions on recruitment” (Grace, 2015).

Despite this fact, Brexit may also find its positive impacts to the UK’s economy. The economy would become less crowded, meaning the GDP per capita would increase. Even though evidence shows that GDP of Britain would rise by 0.4% the overall population would increase too thus decreasing the GDP per capita. This means by Brexit applying its rules to limit migration it would aim to increase the output of everyone individually rather than a nation by doing this the economy would benefit from more efficiency as less people would require to produce more hence bettering their incomes and benefiting their standards of life. “A previous study by the National Institute for Economic and Social Research, carried out for the European Union, found that the long-run impact of obdurate migration from Eastern Europe between 2004 and 2009 could actually depress UK GDP per capita by -0.17%” this means that if UK’s population continues to grow it would cause a decrease in the percentage for GDP per capita and the output per person would de

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