Final answer:
To determine AFW Industries' share price, the dividend payout and the share repurchase amounts are calculated first. Then, using the Gordon Growth Model, the share price is found by dividing the dividend per share by the difference between equity cost of capital and growth rate, resulting in a share price of $24.42.
Step-by-step explanation:
The student has asked how to determine AFW Industries' share price based on given financial information and assumptions. To calculate this, we consider the earnings, payout as dividends, share repurchases, expected growth, and equity cost of capital.
Firstly, we calculate the dividend payout and the effect of share repurchase. AFW plans to pay 36% of its earnings as a dividend and use 27% of its earnings to repurchase shares. In dollar terms, the dividend payout will be $665 million * 36% = $239.4 million. The shares to be repurchased amount to $665 million * 27% = $179.55 million.
Next, we calculate the dividend per share (DPS) and the reduced number of shares outstanding after repurchases. Since the company has 185 million shares outstanding, the DPS is $239.4 million / 185 million = $1.2941. After repurchasing, the amount of shares that would be bought back is $179.55 million / (current share price), which we don't know yet.
Since the company's earnings are expected to grow by 7.1% and the payout ratios remain constant, we can use the Gordon Growth Model to calculate the share price. The model's formula is:
Price = (DPS / (Equity cost of capital - Growth rate))
Here, Equity cost of capital is 12.4% or 0.124 and the growth rate is 7.1% or 0.071. Substituting the given values:
Price = ($1.2941 / (0.124 - 0.071)) = $1.2941 / 0.053 = $24.42
Hence, the share price would be $24.42, rounded to the nearest cent.