Question

Assume that the average firm in the Agro-Industrial sector of firms listed on the ZSE is

expected to grow at a constant rate of 6 percent and its dividend yield is 7 percent. Company
XYZ-Farm Implements Inc. is about as risky as the average firm in the industry, but it has
just successfully completed some groundbreaking Research & Development work that leads
you to expect that its earnings and dividends will grow at a rate of 50 percent [D1 = Do (1 +g)
= 1.50] this year and 25 percent the following year, after which growth should match the 6
percent industry average rate. The last dividend paid (Do) was $1.
What is the value per share of XYZ-Farm Implements Inc.? [

Answer 1

The value per share of XYZ-Farm Implements Inc. is $150.

Step-by-step explanation:

To calculate the value per share of XYZ-Farm Implements Inc., we can use the dividend discount model (DDM). The DDM formula is: V = D1 / (r - g), where V is the value per share, D1 is the expected dividend for the next year, r is the required rate of return, and g is the expected growth rate. In this case, D1 = $1.50, r = 7% (dividend yield), and g = 6% (expected growth rate).

Substituting these values into the formula, we get: V = $1.50 / (0.07 - 0.06)

= $150 per share.