Suppose the risk-free rate is 2.37% and an analyst assumes a market risk premium of 5.76%. Firm A just paid a dividend of $1.21 per share. The analyst estimates the β of Firm A to be 1.33 and estimates the dividend growth rate to be 4.34% forever. Firm A has 269.00 million shares outstanding. Firm B just paid a dividend of $1.66 per share. The analyst estimates the β of Firm B to be 0.82 and believes that dividends will grow at 2.59% forever. Firm B has 182.00 million shares outstanding. What is the value of Firm A?
| Calculation of Value of Firm A | ||
| Risk free rate (Rf) = | 2.37% | |
| Market Risk Premium = | 5.76% | |
| Beta (B)= | 1.33 | |
| Using CAPM | ||
| Required Rate of Return ( Ke)= | Rf + B x Marker Risk Premium | |
| Required Rate of Return ( Ke)= | 2.37% + 1.33 x 5.76% | |
| Required Rate of Return ( Ke)= | 2.37% + 7.6608 % | |
| Required Rate of Return ( Ke)= | 10.03% | |
| Dividend Paid (Do)= | $ 1.21 | |
| Growth rate (g)= | 4.34% | |
| Price (P0) | Do ( 1+g) /(ke-g) | |
| = | $ 1.21 ( 1+ 0.1003) /(0.1003 - 0.0434) | |
| = | $ 1.33 / 0.0569 | |
| $ 23.37 | ||
| Price per share = | $ 23.37 | |
| Shares Outstanding= | 269 million | |
| Value of firm A= | Shares oustanding x price per share | |
| Value of firm A= | 269 x $ 23.37 | |
| Value of firm A= | $ 6286.53 million | |
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