Question

The risk free rate is .02 and the market rate is .15.

1 Use the info below and the zero growth model to find Pitney Bowes’ value.

Beta	1.20
Dividend	$0.75
Shares outstanding	189,000,000

2.           Use the info below and the non-zero growth model to find 3M’s value.

Beta	0.95
Next year’s dividend	$5.82
Growth rate	0.08
Shares outstanding	570,000,000

3.           Use the info below and the non-zero growth model to find ABB’s value.

Beta	0.95
Next year’s dividend	$1.06
Growth rate	0.05
Shares outstanding	2,130,000

Answer 1

1]

cost of equity = risk free rate + (beta * (market rate - risk free rate))

cost of equity = 0.02 + (1.20 * (0.15 - 0.02)) = 0.176

Value per share = next year dividend / cost of equity

Value per share = ($0.75 / 0.176)

Value of firm's equity = value per share * shares outstanding

Value of firm's equity = ($0.75 / 0.176) * 189,000,000

Value of firm's equity = $805,397,727.27

2]

cost of equity = risk free rate + (beta * (market rate - risk free rate))

cost of equity = 0.02 + (0.95 * (0.15 - 0.02)) = 0.1435

Value per share = next year dividend / (cost of equity - growth rate)

Value per share = ($5.82 / (0.1435 - 0.08))

Value of firm's equity = value per share * shares outstanding

Value of firm's equity = ($5.82 / (0.1435 - 0.08)) * 570,000,000

Value of firm's equity = $52,242,519,685.04

3]

cost of equity = risk free rate + (beta * (market rate - risk free rate))

cost of equity = 0.02 + (0.95 * (0.15 - 0.02)) = 0.1435

Value per share = next year dividend / (cost of equity - growth rate)

Value per share = ($1.06 / (0.1435 - 0.05))

Value of firm's equity = value per share * shares outstanding

Value of firm's equity = ($1.06 / (0.1435 - 0.05)) * 2,130,000

Value of firm's equity = $24,147,593.58