Final answer:
The value of Firm A is calculated using the Gordon Growth Model, which involves the next year's expected dividend and the discount rate, which is derived from the risk-free rate and the equity risk premium adjusted for Firm A's beta. The total value of Firm A is obtained by multiplying the estimated value per share of $18.59 with the number of shares outstanding, which gives us $5,075.07 million.
Step-by-step explanation:
To calculate the value of Firm A using the Gordon Growth Model, we take the next year's expected dividend and divide it by the discount rate minus the dividend growth rate.
We can calculate the expected return on Firm A's stock by adding the risk-free rate to the product of Firm A's beta and the market risk premium. This expected return is used as the discount rate. The formula for expected return looks like this: Risk-Free Rate + (Beta x Market Risk Premium).
The expected dividend for next year is the most recent dividend plus expected growth, which can be calculated as $1.40 x (1 + 4.89%). The discount rate for Firm A is 3.05% + (1.49 x 6.99%).
Using these figures, the expected dividend is $1.40 x 1.0489 = $1.4686 and the discount rate is 3.05% + (1.49 x 6.99%) = 13.4311%.
The formula for the value per share is: Expected Dividend / (Discount Rate - Dividend Growth Rate).
Therefore, the value per share for Firm A is $1.4686 / (0.134311 - 0.0489) = $18.59 approximately.
The total value of Firm A is then calculated by multiplying the value per share by the number of shares outstanding: 273.00 million shares x $18.59 = $5,075.07 million.