1. Since 2014, Abercrombie & Fitch (NYSE: ANF) has been paying annual dividends of $0.80 per share. Assume ANF has a cost of equity capital of 9%. The stock has recently traded around $12 per share.

Required:

a. Assuming the dividend will continue to stay at $0.80 per share on a continuing basis, what is the estimated value per share for ANF?

b. Given the difference between the estimated value and the trading price, what inferences can be made?

c. What conclusions might we make about the appropriateness of the constant dividend model for ANF?

Estimated Value Per share for ANF

Dividend $0.80

Growth in dividends 0.0%

Cost of equity capital r_e 9.0%

Current stock price $12.00

End of 2017 End of 2018 End of 2019 Terminal period

Anticipated dividends

Present value factor at 9%

Present value as of start of 2017

Cumulative present value

PV of dividend in perpetuity