Question

Suppose the risk-free rate is 2.95% and an analyst assumes a market risk premium of 7.44%. Firm A just paid a dividend of $1.10 per share. The analyst estimates the β of Firm A to be 1.40 and estimates the dividend growth rate to be 4.77% forever. Firm A has 300.00 million shares outstanding. Firm B just paid a dividend of $1.89 per share. The analyst estimates the β of Firm B to be 0.89 and believes that dividends will grow at 2.08% forever. Firm B has 195.00 million shares outstanding. What is the value of Firm A?

Answer 1

Hi

Here risk free rate rf = 2.95%

market risk premium rmf = 7.44%

beta = 1.40

So required rate of firm A as per CAPM (k) = rf + beta*rmf

= 2.95 + 1.40*7.44

   = 13.366%

Dividend Just paid D0 for firm A= $1.10

growth rate in dividend g= 4.77%

So as per DDM

Per Share Price for firm A= D0*(1+g)/(k-g)

= 1.1*(1+4.77%)/(13.366%-4.77%)

= 1.15247/0.08596

= $13.41

Value of firm A = Per Share Price*Shared outstanding

   = 13.41*300,000,000

   = $4,022,114,937.18

Thanks