Question

 

The risk-free rate is 2.50% and the market risk premium is 7.20%. A stock with a β of 0.93 just paid a dividend of $2.95. The dividend is expected to grow at 22.80% for three years and then grow at 3.77% forever. What is the value of the stock?

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

The risk-free rate is 3.65% and the market risk premium is 6.40%. A stock with a β of 1.11 just paid a dividend of $2.24. The dividend is expected to grow at 23.98% for five years and then grow at 3.12% forever. What is the value of the stock?

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

Caspian Sea Drinks needs to raise $93.00 million by issuing additional shares of stock. If the market estimates CSD will pay a dividend of $2.11 next year, which will grow at 3.46% forever and the cost of equity to be 12.32%, then how many shares of stock must CSD sell?

Answer format: Number: Round to: 0 decimal places.

Suppose the risk-free rate is 3.11% and an analyst assumes a market risk premium of 7.80%. Firm A just paid a dividend of $1.48 per share. The analyst estimates the β of Firm A to be 1.32 and estimates the dividend growth rate to be 4.06% forever. Firm A has 292.00 million shares outstanding. Firm B just paid a dividend of $1.77 per share. The analyst estimates the β of Firm B to be 0.77 and believes that dividends will grow at 2.12% forever. Firm B has 190.00 million shares outstanding. What is the value of Firm A?

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

Suppose the risk-free rate is 3.71% and an analyst assumes a market risk premium of 5.02%. Firm A just paid a dividend of $1.14 per share. The analyst estimates the β of Firm A to be 1.24 and estimates the dividend growth rate to be 4.52% forever. Firm A has 286.00 million shares outstanding. Firm B just paid a dividend of $1.50 per share. The analyst estimates the β of Firm B to be 0.77 and believes that dividends will grow at 2.86% forever. Firm B has 193.00 million shares outstanding. What is the value of Firm B?

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

 

Answer 1

1.First we need to find the Cost of equity or Required return on equity

to discount the dividend cashflows--to find the value of the stock

So,as per CAPM, Cost of equity,ke=RFR+(Beta*Market risk premium)

Putting in the values given for the above variables,

ke=2.50%+(0.93*7.20%)=

9.20%

Now, discounting the dividend cashflows,

Div/yr.	Dividend CFs
D0= 2.95
D1=	2.95*(1+0.2280)^1=	3.62
D2=	2.95*(1+0.2280)^2=	4.45
D3=	2.95*(1+0.2280)^3=	5.46
P3=D4/(ke-g)	(5.46*1.0377)/(9.20%-3.77%)=	104.34
(Price at end of 3rd year)

P0=(D1/(1+ke)^1)+(D2/(1+ke)^2)+(D3/(1+ke)^3)+(P3/(1+ke)^3)

ie.P0=(3.62/(1+9.20%)^1)+(4.45/(1+9.20%)^2)+(5.46/(1+9.20%)^3)+(104.34/(1+9.20%)^3)

91.37

$91.37

2. As in the above case, first we need to find the Cost of equity or Required return on equity

to discount the dividend cashflows--to find the value of the stock

So,as per CAPM, Cost of equity,ke=RFR+(Beta*Market risk premium)

Putting in the values given for the above variables,

ke=3.65%+(1.11*6.40%)=

10.75%

Now, discounting the dividend cashflows,

Div/yr.	Dividend CFs
D0= 2.24
D1=	2.24*(1+0.2398)^1=	3.66
D2=	2.24*(1+0.2398)^2=	4.53
D3=	2.24*(1+0.2398)^3=	5.62
D4=	2.24*(1+0.2398)^4=	5.29
D5=	2.24*(1+0.2398)^5=	6.56
P5=D6/(ke-g)	(6.56*1.0312)/(10.75%-3.12%)=	88.66
(Price at end of 5th year)

Now,

P0=(D1/(1+ke)^1)+(D2/(1+ke)^2)+(D3/(1+ke)^3)+(D4/(1+ke)^4)+(D5/(1+ke)^5)+(P5/(1+ke)^5)

ie.P0=(3.66/(1+10.75%)^1)+(4.53/(1+10.75%)^2)+(5.62/(1+10.75%)^3)+(5.29/(1+10.75%)^4)(6.56/(1+10.75%)^5)+(88.66/(1+10.75%)^5)

71.80

$71.80

3.We need to find the price per share of CSD

by using the formula , to find

Cost of equity by dividend discount model , for constant growth of dividends,

ie. Ke=(D1/P0)+g

where ke= the cost of equity, given as 12.32%

D1=the next dividend , ie. $ 2.11

P0= Price/share --to find ---??

g= the constant growth rate, ie. 3.46%

Plugging in the values,

12.32%=(2.11/P0)+3.46%

Solving the above for P0 , we get the stock price/ share as

23.8149

ie. $ 23.81

Given that ,

Caspian Sea Drinks needs to raise $93.00 million by issuing additional shares of stock

Shares of stock CSD must sell=

$ 93000000/ $ 23.8149=

3905118

No.of shares

4. Finding Cost of equity for Firm A,as per CAPM,

ke=RFR+(Beta*MRP)

ie. 3.11%+(1.32*7.80%)=

13.41%

Now, we need to discount the dividend cash flows , using the above cost of equity,

Value per share of Firm A,ie. P0=D1/(ke-g)

where D1=next dividend=(1.48*1.0406)

ke=13.41% & g= 4.06%

so, P0=(1.48*1.0406)/(13.41%-4.06%)=

16.4715

$16.47

Given that

Firm A has 292.00 million shares o/s

So, value of Firm A= No.of shares o/s*Price per share

ie. 292000000*16.4715=

4809678000

Or

$4,809.68

millions

5.Finding Cost of equity for Firm B,as per CAPM,

ke=RFR+(Beta*MRP)

ie. 3.71%+(0.77*5.02%)=

7.58%

Now, we need to discount the dividend cash flows , using the above cost of equity,

Value per share of Firm A,ie. P0=D1/(ke-g)

where D1=next dividend=(1.50*1.0286)

ke=7.58% & g=2.86%

so, P0=(1.50*1.0286)/(7.58%-2.86%)=

32.6886

$32.69

Given that

Firm B has 193.00 million shares o/s

So, Value of Firm B= No.of shares o/s*Price per share

ie. 193000000*32.6886=

6308899800

Or

$6,308.90

millions