Assume that the average firm in your company's industry is expected to grow at a constant rate of 5 percent, and its dividend yield is 4 percent.You company is about as risky as the average firm in the industry, but it has just developed a line of innovative new products which leads you to expect that its earnings and dividends will grow at a rate of 40 percent.( = D0 ((1 + g) = D0 (1.40)) this year and 25 percent the following year, after which growth should match the 5 percent industry average rate.The last dividend paid (D0) was R2.What is the value per share of your firm's shares?

Question

Quizplus · Accepted Answer

First, we need to find the dividend for the next 2 years:
D1 = D0 (1 + g) = 2 (1 + 0.4) = R2.80
D2 = D1 (1 + g) = 2.80 (1 + 0.25) = R3.50
Then, we can use the Gordon Growth Model to find the value per share:
V0 = D1 / (r - g)
where r is the required rate of return.
Assuming r = 9% (4% dividend yield + 5% industry growth rate), we have:
V0 = 2.80 / (0.09 - 0.40) + 3.50 / (1 + 0.09)2 / (0.09 - 0.05)
V0 = R82.84
Therefore, the best choice is B.

Assume That the Average Firm in Your Company's Industry Is