Allie Reynolds, the chief financial officer of Healthy Products Inc. has been asked to do an evaluation of Fibre Cereal Inc. by the president, Gail Martinez. Healthy Products was planning a joint venture with Fibre Cereal (privately traded) and Gail and Allie needed a better feel for what Fibre's stock is worth because there is interest in buying the firm at some time in the future. Fibre Cereal paid a dividend at the end of year one of $1.20, with an anticipate growth rate of 10 percent and a required rate of return is 13 percent.

a. What is the value of a share based on the dividend valuation model?
b. Indicate that the value computed in part a is correct by showing the values of D₁, D₂, and D₃ and the anticipated share price at the end of year three, as present values. Then sum the computations.
c. As an alternative measure, examine the value of the firm based on the price earnings (P/E) ratio times earnings per share. The anticipated P/E ratio can be estimated by taking the average of five publicly traded food industry companies. The P/E ratios were as follows during the time period under analysis:

................................P/E ratio
Del Monte ..................12
General Mills .............15
Maple Leaf ................14
Kellogg ......................22
Kraft ..........................17

d. If in computing the industry average P/E, it is decided to weight Kellogg by 40 percent and the other four firms by 15 percent each, what would be the new weighted average industry P/E? (Kellogg is more similar to Fibre) What will be the new suggested share price? (earnings per share remain at $2.45)
e. By what percent will the share price change as a result of using the weighted average industry P/E in part d as compared to part c?