Question

Suppose the risk-free rate is 1.86% and an analyst assumes a market risk premium of 5.36%. Firm A just paid a dividend of $1.39 per share. The analyst estimates the β of Firm A to be 1.33 and estimates the dividend growth rate to be 4.65% forever. Firm A has 271.00 million shares outstanding. Firm B just paid a dividend of $1.92 per share. The analyst estimates the β of Firm B to be 0.82 and believes that dividends will grow at 2.53% forever. Firm B has 197.00 million shares outstanding. What is the value of Firm B?

Answer 1

Firm B: Current Dividend = D0 = $ 1.92, Firm Beta = 0.82, Perpetual Dividend Growth Rate = 2.53 %, Risk-Free Rate = 1.86 % and Market Risk Premium = MRP = 5.36 %

Cost of Equity = R = Rf + Beta x MRP = 1.86 + 0.82 x 5.36 = 6.2552 %

Current Stock Price = P = [D0 x (1+Growth Rate)] / [R - Growth Rate] = [1.92 x 1.0253] / [0.062552 - 0.0253] = $ 52.84484

Number of Shares Outstanding = N = 197 million

Therefore, Firm Value = N x P = 197 x 52.84484 = $ 10410.43 million or $ 10.41 billion