Question

Suppose the risk-free rate is 3.50% and an analyst assumes a market risk premium of 6.67%. Firm A just paid a dividend of $1.50 per share. The analyst estimates the β of Firm A to be 1.30 and estimates the dividend growth rate to be 4.86% forever. Firm A has 265.00 million shares outstanding. Firm B just paid a dividend of $1.95 per share. The analyst estimates the β of Firm B to be 0.84 and believes that dividends will grow at 2.02% forever. Firm B has 200.00 million shares outstanding. What is the value of Firm A?

Answer 1

current share price = next year dividend / (cost of equity - constant growth rate) - Gordon model

Firm A cost of equity = risk free rate + (beta * market risk premium)

Firm A cost of equity = 3.50% + (1.30 * 6.67%) ==> 12.17%

current share price = ($1.50 + 4.86%) / (12.17% - 4.86%) ==> $21.52

Firm A number of shares outstanding = 265 million

Value of Firm A = number of shares outstanding * current share price

Value of Firm A = 265 million * $21.52 ==> $5,702,800,000