Final answer:
The value of Firm A is calculated using the Dividend Discount Model and the CAPM, resulting in a share price of $29.61. Multiplying by the number of shares outstanding, Firm A's total value is approximately $8.18 billion.
Step-by-step explanation:
To calculate the value of Firm A, we use the Gordon Growth Model (also known as the Dividend Discount Model) which values a stock based on an assumption that dividends will grow at a constant rate indefinitely. The formula to calculate the present value of a stock is: P = D / (k - g), where P is the price, D is the expected dividend next period, k is the required rate of return, and g is the growth rate.
The required rate of return (k) can be determined using the Capital Asset Pricing Model (CAPM): k = risk-free rate + β (market risk premium). For Firm A, with a risk-free rate of 1.48%, a β of 1.29, and a market risk premium of 6.34%, the required rate of return is calculated as follows: k = 1.48% + (1.29 × 6.34%) = 9.609%
The expected dividend next period (D1) will be: D1 = D0 × (1 + g) = $1.35 × (1 + 4.17%) = $1.4063. Thus, the price per share (P) is: P = $1.4063 / (9.609% - 4.17%) = $29.61 per share. To calculate the total value of Firm A, we multiply the price per share by the number of shares outstanding: Total Value of Firm A = $29.61 × 276 million shares = $8,177.16 million or approximately $8.18 billion.