Question

Suppose the risk-free rate is 3.25% and an analyst assumes a market risk premium of 6.30%....

Suppose the risk-free rate is 3.25% and an analyst assumes a market risk premium of 6.30%. Firm A just paid a dividend of $1.10 per share. The analyst estimates the β of Firm A to be 1.33 and estimates the dividend growth rate to be 4.60% forever. Firm A has 274.00 million shares outstanding. Firm B just paid a dividend of $1.86 per share. The analyst estimates the β of Firm B to be 0.72 and believes that dividends will grow at 2.58% forever. Firm B has 182.00 million shares outstanding. What is the value of Firm A?

Currency: Round to: 2 decimal places.

Homework Answers

Answer #1

Risk-Free rate = 3.25%

Market Risk Premium= 6.30%

β of Firm A =1.33

Paid Dividend (Do) = $1.10 per share

Growth Rate (g) = 4.6%

Required Return = Risk-Free rate + Market Risk Premium*(β of Firm A)

Required Return = 3.25% + 6.30% * 1.33

Required Return = 11.63%

Share Price of Firm A = Expected Dividend(D1)/(Required Return - Growth rate)

Share Price of Firm A = 1.10*1.046/(11.63% - 4.6%)

Share Price of Firm A = 1.1506/0.0703

Share Price of Firm A =16.37

No of Share of Firm A = 274.00 million shares

Value of Firm A = 274 *16.37 =$4,485.38 million

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