Question

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? (Round to 2 decimal places)

Answer 1

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 %
Required Rate of Return ( Ke)=	10.48%
Dividend Paid (Do)=	$ 1.45
Growth rate (g)=	4.11%
Price (Po)=	Do ( 1+g) /(ke-g)
Price (Po)=	$ 1.45 ( 1+ 0.0411) /(0.1048 - 0.0411)
Price (Po)=	$ 1.51 / 0.0637
Price (Po)=	$ 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 to two decimal point. Some round off difference possible in final answer.