Question

g Suppose the risk-free rate is 2.79% and an analyst assumes a market risk premium of 5.07%. Firm A just paid a dividend of $1.38 per share. The analyst estimates the β of Firm A to be 1.24 and estimates the dividend growth rate to be 4.04% forever. Firm A has 259.00 million shares outstanding. Firm B just paid a dividend of $1.51 per share. The analyst estimates the β of Firm B to be 0.84 and believes that dividends will grow at 2.12% forever. Firm B has 181.00 million shares outstanding. What is the value of Firm A?

Answer 1

Answer:

Firm A's total value = $7,378,170,000

Explanation:

Firm A:

equity cost (Re) = 2.79% x (1.24 x 5.07%) = 9.08%

Div₀ = $1.38

Div₁ = $1.435752

g = 4.04%

P₀ = $1.4358 / (9.08% - 4.04%) = $1.435752 / 5.04% = $28.48714286

total outstanding stocks = 259,000,000

Firm A's total value = $28.48714286 x 259,000,000 = $7,378,170,000