Valuation of AGF Company's Common Shares

Explanation

To value AGF Company's common shares, we can use the dividend discount model (DDM). The DDM calculates the present value of all future dividends to determine the intrinsic value of a stock. Here's how we can calculate the value of AGF Company's common shares:

1. Determine the required rate of return (discount rate): The required rate of return is the minimum return an investor expects for taking on the risk of investing in a particular stock. In this case, the risk-free rate is given as 5%, and the market risk premium is 7%. To calculate the required rate of return, we use the formula:

Required Rate of Return = Risk-Free Rate + Beta * Market Risk Premium

Given that AGF Company's common shares have a beta of 1.3, the required rate of return is: Required Rate of Return = 5% + 1.3 * 7% = 14.1%

2. Calculate the expected dividend for the current year: Since we know that the dividend paid last year was $1.90 per share, and the dividends are expected to grow at a rate of 6% forever, we can calculate the expected dividend for the current year:

Expected Dividend = Last Year's Dividend * (1 + Dividend Growth Rate) Expected Dividend = $1.90 * (1 + 6%) = $1.90 * 1.06 = $2.014

3. Calculate the value of the common shares using the DDM formula: The DDM formula states that the value of a stock is equal to the expected dividend divided by the difference between the required rate of return and the dividend growth rate. Mathematically, it can be expressed as:

Value of Stock = Expected Dividend / (Required Rate of Return - Dividend Growth Rate)

Plugging in the values: Value of Stock = $2.014 / (14.1% - 6%) = $2.014 / 8.1% = $24.8642

Rounding to two decimal places, the value of AGF Company's common shares is closest to $24.86.

Therefore, the correct answer is B. $24.86.