BBS67 Principle of Finance Individual Assignment Questions| UoM

BBS67 Individual Assignment (20 marks)

This assignment was designed to test students’ knowledge on the concept of share valuation (Topic 2). Students are expected to perform computations and to critically evaluate the approach.

Question (20  marks)

Assume today is 31 December 2025. Firm X, a commodity consumer, operates a petrochemical plant. Firm X plans to build a second facility in 2028. It is expected to implement the following dividend payouts for the next three years:

The estimated net profit after-tax is $500 million for the year 2028. The company issued $1 billion, 5% preference shares. The firm pays preference dividends every year. It plans to continue doing so for the next 3 years. The expected price-earnings ratio by the end of year 2028 is 15 times. Shareholders of Firm X require a 10 percent return on Firm X’s shares.

Required

1. Compute the intrinsic value of Firm X’s common shares. Use the Dividend Discount Model.
2. Critically evaluate the Dividend Discount Model as an approach for share valuation for commodity consumers. Explain which alternative methods may be more appropriate for this type of company.

Note:

1. To provide all relevant formulae and to show all workings with accompanying explanations.
2. Word count requirement: Maximum 1000 (actual wordcount to be stated at the beginning of your answer.
3. Minimum number of references: 2