Question

AFW Industries has 212 million shares outstanding and expects earnings at the end of this year of $665 million. AFW plans to pay out 64% of its earnings in total, paying 39% as a dividend and using 25\% to repurchase shares. If AFW's earnings are expected to grow by 7.2\% per year and these payout rates remain constant, determine AFW's share price assuming an equity cost of capital of 12.9%. The price per share will be $ (Round to the nearest cent.)

Answer 1

The share price of AFW Industries is determined using the earnings per share, dividend per share, the number of shares repurchased, and the Gordon Growth Model, taking into account the given growth rate and the equity cost of capital.

Step-by-step explanation:

To determine AFW Industries' share price, we first calculate the earnings per share (EPS) by dividing total earnings of $665 million by the number of shares outstanding, which is 212 million. This gives us the EPS before the repurchase. Next, we calculate the dividend per share (DPS) by taking the EPS and applying the 39% dividend payout ratio. We then determine how many shares will be repurchased with the 25% of earnings set aside for repurchases. After reducing the number of outstanding shares by the repurchased amount, we calculate the new EPS. To find the share price, we use the Gordon Growth Model, which calculates the price of a stock as the present value of all future dividends, with dividends expected to grow at a constant rate. Here, we use the growth rate of 7.2% and the equity cost of capital of 12.9%.

By plugging these numbers into the Gordon Growth Model formula, we arrive at AFW's share price. Keep in mind to round the final answer to the nearest cent. It's important to consider both dividends and capital gains when assessing the attractiveness of a stock as an investment, as investors typically seek both as part of their total return.