Question

AFW industries has 200 million shares outstanding and expects earnings at the of this year of $700 million. AFW plans to pay out 60% of its earnings in total, paying 40% as a dividend and using 20% to repurchase shares. If AFW's earnings are expected to grow by 8.0% per year and these payout rates remain constant, determine AFW's share price assuming an equity cost of captial of 12.0%. The price per share will $_____________ (round to the nearest cent.)

Answer 1

To calculate the share price of AFW industries, we use the Gordon Growth Model to determine the present value of expected dividends and share repurchases. Using a constant growth rate of 8.0% per year and an equity cost of capital of 12.0%, the share price is calculated to be $14 billion. Finally, dividing the share price by the number of shares outstanding, the price per share is approximately $70.

Step-by-step explanation:

To determine the share price of AFW industries, we need to calculate the present value of the expected future dividends and share repurchases. First, let's calculate the amount of dividends and share repurchases:

Dividends: 60% of $700 million = $420 million

Share repurchases: 20% of $700 million = $140 million

Next, we need to calculate the present value of these cash flows using the equity cost of capital of 12.0%. Assuming a constant growth rate of 8.0% per year, we can use the Gordon Growth Model:

Share price = (Dividends + Share repurchases) / (Cost of equity capital - Growth rate)

Share price = ($420 million + $140 million) / (0.12 - 0.08)

Share price = $560 million / 0.04

Share price = $14 billion

Finally, to find the price per share, we divide the share price by the number of shares outstanding:

Price per share = Share price / Number of shares outstanding

Price per share = $14 billion / 200 million

The price per share ≈ $70 (rounded to the nearest cent).