Question

Suppose the risk-free rate is 1.26% and an analyst assumes a market risk premium of 7.54%. Firm A just paid a dividend of $1.39 per share. The analyst estimates the β of Firm A to be 1.42 and estimates the dividend growth rate to be 4.03% forever. Firm A has 270.00 million shares outstanding. Firm B just paid a dividend of $1.75 per share. The analyst estimates the β of Firm B to be 0.84 and believes that dividends will grow at 2.68% forever. Firm B has 191.00 million shares outstanding. What is the value of Firm B?

ANSWER FORMAT: CURRENCY. ROUND TO 2 DECIMALS.

Answer 1

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

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

Firm B cost of equity = 1.26% + (0.84 * 7.54%) ==> 7.59%

current share price = ($1.75 + 2.68%) / (7.59% - 2.68%) ==> $36.60

Firm B number of shares outstanding = 191 million

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

Value of Firm A = 191 million * $36.60 ==> $6,990,600,000