The following information is available for two different common stocks: company A and Company B.
Company A Company B
Free cash flow per share in the current year $1.30 $6.00
Growth rate in cash flow per share 10% 3%
Beta 1.5 .7
Risk-free return 6.5% 6.5%
Expected return on all stocks 14.5% 14.5%
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.