1). According to the CAPM,
Required Return for firm A = Risk-free Rate + [Beta * Market risk premium]
= 2.45% + [1.45 * 5.30%] = 2.45% + 7.685% = 10.135%
Share Price for firm A = [Current Dividend * (1 + g)] / [r - g]
= [$1.31 * (1 + 0.0489)] / [0.10135 - 0.0489]
= $1.37406 / 0.05245 = $26.20
Value of Firm A = Share Price for firm A * Shares Outstanding
= $26.20 * 260 million = $6,811.35 million
6). According to the CAPM,
Required Return for firm B = Risk-free Rate + [Beta * Market risk premium]
= 2.44% + [0.78 * 6.11%] = 2.44% + 4.7658% = 7.2058%
Share Price for firm B = [Current Dividend * (1 + g)] / [r - g]
= [$1.91 * (1 + 0.0270)] / [0.072058 - 0.0270]
= $1.96157 / 0.045058 = $43.53
Value of Firm B = Share Price for firm B * Shares Outstanding
= $43.53 * 190 million = $8,271.52 million
Suppose the risk-free rate is 2.45% and an analyst assumes a market risk premium of 5.30%. Firm A just paid a dividend...
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