Question

Suppose the risk-free rate is 2.96% and an analyst assumes a market risk premium of 6.98%. Firm A just paid a dividend of $1.17 per share. The analyst estimates the β of Firm A to be 1.41 and estimates the dividend growth rate to be 4.86% forever. Firm A has 294.00 million shares outstanding. Firm B just paid a dividend of $1.65 per share. The analyst estimates the β of Firm B to be 0.75 and believes that dividends will grow at 2.15% forever. Firm B has 198.00 million shares outstanding. What is the value of Firm B?

Answer 1

The value of Firm B is approximately $21.17 per share.

Step-by-step explanation:

To calculate the value of Firm B, we can use the dividend discount model (DDM). The DDM formula is: Price per share = Dividend / (Discount rate - Dividend growth rate).

Using the given information, for Firm B, the dividend is $1.65 per share, the discount rate is the sum of the risk-free rate and the market risk premium (2.96% + 6.98% = 9.94%), and the dividend growth rate is 2.15%.

Plugging in the values, we get: Price per share = $1.65 / (9.94% - 2.15%) = $1.65 / 7.79% = $21.17. Therefore, the value of Firm B is approximately $21.17 per share.