You Are Considering the Shares of Two Firms to Add

question 75

Essay

You are considering the shares 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:
D1 D2 P2
Firm A $2 $2 $60.70
Firm B 4 4 56.42
The required rate of return for the shares of Firm A is 14%.Ignore taxes or transaction fees.
a.How much would investors pay for the shares of Firm A?
b.How much would investors pay for the shares 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:

Group Polarization

The process where prevailing opinions or beliefs within a group intensify after the group engages in discussion.

Normative Social Influence

The influence of other people that leads us to conform in order to be liked and accepted by them.

Persuasive Arguments

Statements designed to convince or influence others to accept a specific point of view or action.

Deindividuation

A psychological state where an individual loses self-awareness and personal responsibility in groups, often leading to atypical behavior.