You Are Considering the Stock of Two Firms to Add

question 117

Essay

You are considering the stock of two firms to add to your portfolio.The companies differ only with respect to their dividend policies.For both firms,investors expect EPS for each of the next two years to be $7 and dividends and ending price for each of the next two periods to be:
The required rate of return for the stock of Firm A is 14%.Ignore taxes or transaction fees.
a.How much would investors pay for the stock of Firm A?
b.How much would investors pay for the stock of Firm B?
c.For a less-than-perfect world,provide an argument for each of the following:
(1)Investors prefer the dividend policy of Firm A.
(2)Investors prefer the dividend policy of Firm B.
(3)Firms prefer the dividend policy of Firm A.

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Definitions:

Homogeneous Oligopoly

A market structure in which a few companies sell products that are identical or very similar.

Interproduct Competition

Refers to the competition between different products that serve as substitutes for each other, catering to the same customer needs but perhaps with different characteristics or price points.

Industrial Alcohol

Alcohol produced for use in industrial applications, such as solvents, fuel, and raw materials for chemical synthesis, rather than for consumption.

Mutual Interdependence

A situation in a market where the actions of one firm can significantly impact the welfare of another, often seen in oligopolistic markets.