Question

Suppose the risk-free rate is 2.68% and an analyst assumes a market risk premium of 7.50%. Firm A just paid a dividend of $1.35 per share. The analyst estimates the β of Firm A to be 1.29 and estimates the dividend growth rate to be 4.72% forever. Firm A has 278.00 million shares outstanding. Firm B just paid a dividend of $1.75 per share. The analyst estimates the β of Firm B to be 0.81 and believes that dividends will grow at 2.24% forever. Firm B has 195.00 million shares outstanding. What is the value of Firm A?

Round to 2 decimals

Answer 1

Required rate of return for Stock A:   Rf + Beta *Market risk premium
			2.68% + 1.29*7.50% = 12.355%
Expected dividend = 1.35+4.72% = 1.414
Stock price = Expected dividend / (Required rate-Growth rate)
	1.414 / (12.355-4.72)% = $ 18.52 perr share
Value of Firm A:
Number of shares			278	million
Multipy: Share price			18.52
Value of Firm A:			5148.56	million