Question

1. Suppose the risk-free rate is 2.64% and an analyst assumes a market risk premium of 6.89%. Firm A just paid a dividend of $1.25 per share. The analyst estimates the β of Firm A to be 1.41 and estimates the dividend growth rate to be 4.64% forever. Firm A has 276.00 million shares outstanding. Firm B just paid a dividend of $1.53 per share. The analyst estimates the β of Firm B to be 0.85 and believes that dividends will grow at 2.48% forever. Firm B has 200.00 million shares outstanding. What is the value of Firm A?

2. Suppose the risk-free rate is 3.32% and an analyst assumes a market risk premium of 7.84%. Firm A just paid a dividend of $1.07 per share. The analyst estimates the β of Firm A to be 1.36 and estimates the dividend growth rate to be 4.77% forever. Firm A has 293.00 million shares outstanding. Firm B just paid a dividend of $1.67 per share. The analyst estimates the β of Firm B to be 0.78 and believes that dividends will grow at 2.03% forever. Firm B has 184.00 million shares outstanding. What is the value of Firm B?

Answer format: Currency: Round to: 2 decimal places.

HELP

Answer 1

1)	Risk free rate (Rf)	2.64%
	Market risk premium (Rm-Rf)	6.89%
	Beta	1.41
	Dividend paid (D0)	$1.25
	Growth(g)	4.64%
	Shares outstanding	276 millions
	Required return (Re)= Rf+(Rm-Rf)*Beta
		2.64+(6.89)*1.41
		12.3549%
	As per Gordon model,
	Price= (D0*(1+g))/(Re-g)
	(1.25*(1+0.0464))/(0.123549-0.0464)
	$16.95
	Value of Firm A= Price per share* Shares outstanding
		$(16.95*276)millions
		$4,678.20	millions
2)	Risk free rate (Rf)	3.32%
	Market risk premium (Rm-Rf)	7.84%
	Beta	0.78
	Dividend paid (D0)	$1.67
	Growth(g)	2.03%
	Shares outstanding	184 millions
	Required return (Re)= Rf+(Rm-Rf)*Beta
		3.32+(7.84)*0.78
		9.4352%
	As per Gordon model,
	Price= (D0*(1+g))/(Re-g)
	(1.67*(1+0.0203))/(0.094352-0.0203)
	$23.01
	Value of Firm B= Price per share* Shares outstanding
		$(23.01*184)millions
		$4,233.84	millions