1 The ArtForAll Co AFA just paid a dividend of 175 per share

1. The ArtForAll Co. (AFA )just paid a dividend of $1.75 per share on its stock. The dividends are expected to grow at a constant rate of 4% per year indefinitely. If investors require a return of 10% on AFA’s stock: What is the current price? What will the price be in 3 years? In 10 years?

Solution

Recent Dividend, D0 = $1.75
Growth Rate, g = 4%
Required Return, r = 10%

Answer a.

D1 = D0 * (1 + g)
D1 = $1.75 * 1.04
D1 = $1.82

Current Price = D1 / (r - g)
Current Price = $1.82 / (0.10 - 0.04)
Current Price = $1.82 / 0.06
Current Price = $30.33

Answer b.

D4 = D0 * (1 + g)^4
D4 = $1.75 * 1.04^4
D4 = $2.0473

Price in 3 years = D4 / (r - g)
Price in 3 years = $2.0473 / (0.10 - 0.04)
Price in 3 years = $2.0473 / 0.06
Price in 3 years = $34.12

Answer c.

D11 = D0 * (1 + g)^11
D11 = $1.75 * 1.04^11
D11 = $2.6940

Price in 10 years = D11 / (r - g)
Price in 10 years = $2.6940 / (0.10 - 0.04)
Price in 10 years = $2.6940 / 0.06
Price in 10 years = $44.90