Question

#5

Suppose the risk-free rate is 2.27% and an analyst assumes a market risk premium of 5.90%. Firm A just paid a dividend of $1.43 per share. The analyst estimates the β of Firm A to be 1.42 and estimates the dividend growth rate to be 4.55% forever. Firm A has 295.00 million shares outstanding. Firm B just paid a dividend of $1.61 per share. The analyst estimates the β of Firm B to be 0.74 and believes that dividends will grow at 2.86% forever. Firm B has 182.00 million shares outstanding. What is the value of Firm A?

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Answer format: Currency: Round to: 2 decimal places.

unanswered

not_submitted

#6

Suppose the risk-free rate is 2.44% and an analyst assumes a market risk premium of 6.11%. Firm A just paid a dividend of $1.32 per share. The analyst estimates the β of Firm A to be 1.29 and estimates the dividend growth rate to be 4.48% forever. Firm A has 297.00 million shares outstanding. Firm B just paid a dividend of $1.91 per share. The analyst estimates the β of Firm B to be 0.78 and believes that dividends will grow at 2.70% forever. Firm B has 190.00 million shares outstanding. What is the value of Firm B?

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Answer format: Currency: Round to: 2 decimal places.

final answer should be written in millioms

Answer 1

Answer #5 )

The given details of firm A

Risk free rate (RFR) = 2.27 %
Market risk premium = 5.90 %
Beta = 1.42
r = 2.27% + 1.42 ( 5.90%)
r = 2.27% + 8.38% = 10.65%
Dividend paid recently = $1.43
Dividend growth rate = 4.55% in perpetuity
Number of shares outstanding = 295 million
The value of firm A
Vo ( Value of share) = D1 / (r - g)
Vo = Do x (1+g) / (r - g)
Vo = $ 1.43 x ( 1 + 0.0455) / ( 0.1065 - 0.0455)
Vo = $ 1.495 / 0.061
Vo = $ 24.51 ( Value of share)
Value of the firm = Value of Equity + Value of debt
Value of Equity = Number of shares outstanding x Price / share
Value of Equity = 295 m x $ 24.51
Value of Equity = $ 7320.45 million
Since the value of deb is not given we will assume it as zero.
Therefore value of firm A = $ 7320.45 million

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