Question

Suppose the risk-free rate is 1.60% and an analyst assumes a market risk premium of 5.61%. Firm A just paid a dividend of $1.14 per share. The analyst estimates the β of Firm A to be 1.39 and estimates the dividend growth rate to be 4.86% forever. Firm A has 256.00 million shares outstanding. Firm B just paid a dividend of $1.81 per share. The analyst estimates the β of Firm B to be 0.78 and believes that dividends will grow at 2.13% forever. Firm B has 187.00 million shares outstanding. What is the value of Firm A?

Answer 1

Calculation of Value of Firm A
Risk free rate (Rf) =	1.60%
Market Risk Premium =	5.61%
Beta (B)=	1.39
Using CAPM
Required Rate of Return ( Ke)=	Rf + B x Marker Risk Premium
Required Rate of Return ( Ke)=	1.60% + 1.39 x 5.61%
Required Rate of Return ( Ke)=	1.60% + 7.7979 %
Required Rate of Return ( Ke)=	9.40%
Dividend Paid (Do)=	$ 1.14
Growth rate (g)=	4.86%
Price (Po)=	Do ( 1+g) /(ke-g)
Price (Po)=	$ 1.14 ( 1+ 0.0486) /(0.0940 - 0.0486)
Price (Po)=	$ 1.20 / 0.0454
Price (Po)=	$ 26.43
Price per share =	$ 26.43
Shares Outstanding=	256 million
Value of firm A=	Shares oustanding x price per share
Value of firm A=	256 x $ 26.43
Value of firm A=	$ 6766.08 million
Note: Figures are round off to two decimal point. Some round off difference possible in final answer.