Question

unanswered not submitted Suppose the risk-free rate is 1.22% and an analyst assumes a market risk premium of 6.40%. Firm A just paid a dividend of $1.18 per share. The analyst estimates the ß of Firm A to be 1.42 and estimates the dividend growth rate to be 4.93% forever. Firm A has 289.00 million shares outstanding. Firm B just paid a dividend of $1.99 per share. The analyst estimates the ß of Firm B to be 0.81 and believes that dividends will grow at 2.87% forever. Firm B has 186.00 million shares outstanding What is the value of Firm A? Submit Answer format: Currency: Round to: 2 decimal places.

Answer 1

Risk-free Rate [Rs] = 1.22% Market Risk Premium = 6.40 % (MRP] Beta = 1.42 Dividend paid by Firm A [..] = $ 1.18 Growth Rate (g) - 4.93%. Shares Outstanding = 289 million shares STEP 1 : Compute required return [Ke] fos Fism A. Ke = Rf + [beta x MRP] = 1,22 + [1.42 x 6.40] e 1.22 + 9.088 = 10.308 %. STEP 2 : Compute Stock Price [P]. Po = D. (1+ growth) Ke growth = 1.18 (1.0493) 0.10308 - 0.0493 1.238174 0.05378 = $ 23.0229 STEP 3: Compute Value of Firm A [VA] Va = Po x shares outstanding = $ 23.0229 x 289000000 shades = $ 6,65 3,618,100 →ie $ 6653.62 million