Question

Assume there are three companies that in the past year paid exactly the same annual dividend of ​$2.88 a share. In​ addition, the future annual rate of growth in dividends for each of the three companies has been estimated as​ follows:

(Click on the icon located on the​ top-right corner of the data table below in order to copy its contents into a​ spreadsheet.)

​Buggies-Are-Us	Steady​ Freddie, Inc	Gang Buster Group
g​ = 0	g​ = 9​%	Year 1	​$3.24
​(i.e., dividends are expected to remain at ​$2.88​/share)	​(for the foreseeable future)	Year 2	​$3.64
		Year 3	​$4.09
		Year 4	​$4.60
		Year 5 and​ beyond: g​ = 9%

Assume also that as the result of a strange set of​ circumstances, these three companies all have the same required rate of return (r=14%).

a. Use the appropriate DVM to value each of these companies.

b. Comment briefly on the comparative values of these three companies. What is the major cause of the differences among these three​ valuations?

a. For​ Buggies-Are-Us, the value of the​ company's common shares is $___. (Round to the nearest​ cent.)

For Steady​ Freddie, Inc., the value of the​ company's common shares is $__. (Round to the nearest​ cent.)

For Gang Buster​ Group, the value of the​ company's common shares is $___. (Round to the nearest​ cent.)

b. Comment briefly on the comparative values of these three companies. What is the major cause of the differences among these three​ valuations?​(Select the best choice​ below.)

A.The value of​ Buggies-Are-Us is $20.57 compared to $62.80 for Steady​ Freddie, Inc., and $70.45 for Gang Busters Group. The difference in values is caused by the difference in dividend growth rates. The​ Buggies-Are-Us dividends do not​ grow, resulting in the lowest value. The dividends of Steady​ Freddie, Inc., grow at a constant rate of 9​% forever, whereas Gang Busters​ Group's dividends grow at approximately​ 12% for the first four years and 14​% from year five to the foreseeable future. The higher growth in dividends in the earlier years causes the stock of Gang Busters Group to be worth more than Steady​ Freddie, Inc., stock.

B. The value of​ Buggies-Are-Us is $20.57 compared to $62.80 for Steady​ Freddie, Inc., and $70.45 for Gang Busters Group. The difference in values is caused by the difference in dividend growth rates. The​ Buggies-Are-Us dividends do not​ grow, resulting in the lowest value. The dividends of Steady​ Freddie, Inc., grow at a constant rate of 9​% forever; whereas Gang Busters​ Group's dividends grow at approximately​ 12% for the first four years and 9​% from year five to the foreseeable future. The higher growth in dividends in the earlier years causes the stock of Gang Busters Group to be worth more than the Steady​ Freddie, Inc., stock.

Answer 1