Question

Really need help with this question thanks

Suppose the risk-free rate is 1.88% and an analyst assumes a market risk premium of 6.48%. Firm A just paid a dividend of $1.48 per share. The analyst estimates the B of Firm A to be 1.43 and estimates the dividend growth rate to be 4.28% forever. Firm A has 281.00 million shares outstanding. Firm B just paid a dividend of $1.61 per share. The analyst estimates the B of Firm B to be 0.78 and believes that dividends will grow at 2.80 % 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

Using CAPM, Required rate of equity (r) = Rf + beta x MRP = 1.88% + 1.43 x 6.48% = 11.15%

Value of Firm A share = D0 x (1 + g) / (r - g) = 1.48 x (1 + 4.28%) / (11.15% - 4.28%) = $22.48

Value of Firm A = 22.48 x 281m = $6,315.97 million