Question

Suppose the risk-free rate is 2.37% and an analyst assumes a market risk premium of 7.56%. Firm A just paid a dividend of $1.36 per share. The analyst estimates the β of Firm A to be 1.30 and estimates the dividend growth rate to be 4.78% forever. Firm A has 257.00 million shares outstanding. Firm B just paid a dividend of $1.80 per share. The analyst estimates the β of Firm B to be 0.84 and believes that dividends will grow at 2.22% forever. Firm B has 181.00 million shares outstanding. What is the value of Firm B?

Answer format: Currency: Round to: 2 decimal places.

Answer 1

Risk-Free Rate(Rf) = 2.37%

Market Risk Premium(Rmp) = 7.56%

Beta of Firm B = 0.84

Required Rate of Return = Rf + β(Rmp)

= 2.37% + 0.84(7.56%)

= 8.72%

Firm B just paid Dividend(D0) = $1.80

Dividend Growth rate (g) = 2.22% forever

Calculating the Price of Stock of Firm B:-

P0 = $28.31 per share

No of Shares Outstanding of Firm B = 181 million shares

Value of Firm B = 181 million shares*$28.31 per share

= $5124.11 million