Question
Wentworth Farms recently announced that it would make a share issue at $9.80 a share. The company has been paying an annual dividend on its
Wentworth Farms recently announced that it would make a share issue at $9.80 a share. The company has been paying an annual dividend on its shares of $0.25 per annum since it was established five years ago. The company recently announced that higher profits to be generated by improvements to several farm properties it has been undertaking over the last two years would result in higher earnings and dividends in the future. The capital raised from the share issue would assist in funding further improvements in existing farm properties. As a shareholder in the company you have been monitoring the company’s performance closely and are considering subscribing to the new share issue. You expect the company will increase dividends by 20% in the coming year, then by 40% in the following year, 30% in the third year, and 15% in the fourth year. Thereafter, you expect dividends to grow at 7% per annum for the foreseeable future reflecting the long-term average growth rate for agricultural businesses. What value would you place on the company’s shares given you require a return of 12% per annum? Would you subscribe to the new share issue?
Step by Step Solution
3.42 Rating (149 Votes )
There are 3 Steps involved in it
Step: 1
To value the companys shares we can use the dividend discount model DDM approach which calculates th...Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started