In: Finance
Suppose the risk-free rate is 1.88% and an analyst assumes a market risk premium of 7.11%. Firm A just paid a dividend of $1.45 per share. The analyst estimates the β of Firm A to be 1.21 and estimates the dividend growth rate to be 4.11% forever. Firm A has 277.00 million shares outstanding. Firm B just paid a dividend of $1.62 per share. The analyst estimates the β of Firm B to be 0.87 and believes that dividends will grow at 2.78% forever. Firm B has 182.00 million shares outstanding. What is the value of Firm A?
Calculation of Value of Firm A | |||||
Risk free rate (Rf) = | 1.88% | ||||
Market Risk Premium = | 7.11% | ||||
Beta (B)= | 1.21 | ||||
Using CAPM | |||||
Required Rate of Return ( Ke)= | Rf + B x Marker Risk Premium | ||||
Required Rate of Return ( Ke)= | 1.88% + 1.21 x 7.11% | ||||
Required Rate of Return ( Ke)= | 1.88% + 8.6031 % | ||||
10.48% | |||||
Dividend Paid (Do)= | $ 1.45 | ||||
Growth rate (g)= | 4.11% | ||||
Price (Po) | Do ( 1+g) /(ke-g) | ||||
= | $ 1.45 ( 1+ 0.0411) /(0.1048 - 0.0411) | ||||
= | $ 1.51 / 0.0637 | ||||
$ 23.70 | |||||
Price per share = | $ 23.70 | ||||
Shares Outstanding= | 277 million | ||||
Value of firm A= | Shares oustanding x price per share | ||||
Value of firm A= | 277 x $ 23.70 | ||||
Value of firm A= | $ 6564.90 million | ||||
Note: Figures are round off to two decimal point. Some round off difference possible in final answer. | |||||