Question

Suppose the risk-free rate is 1.24% and an analyst assumes a market risk premium of 6.69%. Firm A just paid a dividend of $1.31 per share. The analyst estimates the β of Firm A to be 1.40 and estimates the dividend growth rate to be 4.85% forever. Firm A has 261.00 million shares outstanding. Firm B just paid a dividend of $1.67 per share. The analyst estimates the β of Firm B to be 0.80 and believes that dividends will grow at 2.23% forever. Firm B has 181.00 million shares outstanding. What is the value of Firm A?

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#5

Suppose the risk-free rate is 2.04% and an analyst assumes a market risk premium of 6.98%. Firm A just paid a dividend of $1.11 per share. The analyst estimates the β of Firm A to be 1.39 and estimates the dividend growth rate to be 4.12% forever. Firm A has 284.00 million shares outstanding. Firm B just paid a dividend of $1.67 per share. The analyst estimates the β of Firm B to be 0.81 and believes that dividends will grow at 2.97% forever. Firm B has 184.00 million shares outstanding. What is the value of Firm B?

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Answer 1

Given that,

Risk free rate Rf = 1.24%

market risk premium MRP = 6.69%

Firm A just paid a dividend of $1.31 per share. The analyst estimates the β of Firm A to be 1.40 and estimates the dividend growth rate to be 4.85% forever. Firm A has 261.00 million shares outstanding.

=> D0 = $1.31

Beta = 1.40

growth rate g = 4.85%

So, cost of equity using CAPM = Rf + beta*MRP

=> Firm A's Ke = 1.24 + 1.4*6.69 = 10.61%

So, value of stock today using constant dividend growth rate is

P0 = D0*(1+g)/(Ke -g) = 1.31*1.0485/(0.1061 - 0.0485) = $23.86

So, Value of firm A = $23.86

2).

Given that,

Risk free rate Rf = 2.04%

market risk premium MRP = 6.98%

Firm B just paid a dividend of $1.67 per share. The analyst estimates the β of Firm B to be 0.81 and estimates the dividend growth rate to be 2.97% forever.

=> D0 = $1.67

Beta = 0.81

growth rate g = 2.97%

So, cost of equity using CAPM = Rf + beta*MRP

=> Firm B's Ke = 2.04 + 0.81*6.98 = 7.69%

So, value of stock today using constant dividend growth rate is

P0 = D0*(1+g)/(Ke -g) = 1.67*1.0297/(0.0769 - 0.0297) = $36.40

So, Value of firm B = $36.40