Question1

Assume today is 31 December 2020. Firm P, a gold mining company, just paid dividends to its common shareholders. It is expected to pay dividends of $ 9 million, $12 million, $5 million and nil dividends, for the next 4 years.

Four years from now, the estimated net profit after tax is $50 million. The company adopts the policy of not issuing preference shares. The expected price multiple for the year 2024 is 15 times of earnings. The cost of equity for Firm P is 10 percent.

Required

* Compute the intrinsic value of Firm Ps common shares.

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

Note: To show all workings with accompanying explanations.

Word count requirement: 500 (actual word count to be stated on the cover page of the assignment).