7.18 The information in Table 7.8 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 $1.00 $5.00 Growth rate in cash flow per share 8% 4%
Beta 1.3 0.8 Risk-free return 7% 7%
Expected return on all stocks 13.5% 13.5%

a. Estimate the cost of equity for each firm. Answer: Company A = 15.45%; Company B = 12.2%

b. Assume that the companies’ growth will continue at the same rates indefinitely. Estimate the per-share value of each company’s common stock. Answer: Company A = $13.42; Company B = $61.00