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Question: Discuss the model that you believe best fits the reality of the firm you are analysing and why. E...

Discuss the model that you believe best fits the reality of the firm you are analysing and why. Explain how you estimate the future growth of the firm.

Example model: FCFE model. DDM model and fundamental model. The firm is BASF (German chemical company and the largest chemical producer in the world).

Typed the answers please.

Answer 1

I believe the FCFE model best fits the reality of the firm. FCFE is the net cash available to shareholders after taxes and capital expenditure. Whereas in case of DDM model it can be used only when the company is stable in paying dividends. Generally companies pay dividend at market rate in order to satisfy shareholders and retain amount for further purposes. That dividend model would not give a perfect scenario of company as it is generally considered better from the minority shareholders point of view. FCFE would give the net earnings which gives a wide scenario of the firm's earning capacity. Dividend rate may vary depending on the market expectation and in few situations company may retain earnings for a capital investment. In such case cash flows disounted is a best option where it is solely dependent on performance of company.