The Following Information Is Available for Two Different Common Stocks

question 65

Essay

The following information is available for two different common stocks: company A and Company B.
$$\begin{array} { | l | l | l |} \hline & { \text { Company A } } & { \text { Company B } } \\\hline \begin{array} { l } \text { Free frsh flow per share } \\\text { in the curent year }\end{array} & \$ 1.00 & \$ 5.00 \\\hline \begin{array} { l } \text { Grawthrate in cath flow } \\\text { per share }\end{array} & 8 \% & 4 \% \\\hline \text { Beta } & 1.3 & .8 \\\hline \text { Risk-free return } & 7 \% & 7 \% \\\hline \begin{array} { l } \text { Expected return on all } \\\text { stacks }\end{array} & 13.5 \% & 13.5 \% \\\hline\end{array}$$
a. Estimate the cost of equity for each firm.
b. Assume that the companies' growth rates will continue at the same rate indefinitely. Estimate the per share value of each companies common stock.

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