Question

A risk analyst gives Oracle Corporation, the enterprise software and database management firm, a CAPM equity beta of 1.8. As of May 2011, the risk free rate is 1.1 percent, the market risk premium is 6%, the analyst is forecasting for Oracle to have EPS of $3.00 per share and P/E ratio to be 18.0, for the fiscal year ending May 31, 2012. The company is expected to pay $9.56 in dividends per share for the fiscal year. The value per share of equity of Oracle Corporation is:

Answer 1

$56.8

Explanation:

For computation of value per share of equity first we need to find out the cost of equity and market price which is shown below:-

Cost of equity = Risk free rate of return + beta × (Market rate of return - Risk free rate)

= 1.1% + 1.8 × (6%)

= 11.9%

The market rate of return - risk free rate of return is also known as market risk premium

Price earning ratio = Market price ÷ Earning per share

Market price = 18.0 × $3.00

= $54

Value of equity = (Market price ÷ Cost of equity) + (Dividend per share ÷ Cost of equity)

= ($54 ÷ (1 + 11.9% ÷ 100)) + ($9.56 ÷ (1 + 11.9% ÷ 100))

= ($54 ÷ 1.119) + ($9.56 ÷ 1.119)

= $48.26 + $8.54

= $56.8