Question

Suppose the risk-free rate is 1.77% and an analyst assumes a market risk premium of 6.32%. Firm A just paid a dividend of $1.28 per share. The analyst estimates the β of Firm A to be 1.22 and estimates the dividend growth rate to be 4.33% forever. Firm A has 261.00 million shares outstanding. Firm B just paid a dividend of $1.58 per share. The analyst estimates the β of Firm B to be 0.83 and believes that dividends will grow at 2.63% forever. Firm B has 188.00 million shares outstanding. What is the value of Firm A?

Answer 1

To find the value of Firm A, we can use the Dividend Discount Model (DDM). The present value of dividends is negative because the discount rate is higher than the growth rate.

Step-by-step explanation:

To find the value of Firm A, we can use the Dividend Discount Model (DDM). DDM calculates the value of a stock by discounting its future dividends. The formula for DDM is:

Value = Dividend / (Risk-Free Rate - Growth Rate)

Using the given information:

• Risk-Free Rate = 1.77%
• Market Risk Premium = 6.32%
• Dividend = $1.28 per share
• Beta (β) of Firm A = 1.22
• Dividend growth rate = 4.33%
• Shares outstanding = 261.00 million

Plug the values into the DDM formula:

Value = $1.28 / (0.0177 - 0.0433) = $1.28 / (-0.0256)

The present value of dividends is negative because the discount rate is higher than the growth rate. Therefore, Firm A does not have a positive value using the given information.