Question

Assume there are three companies that in the past year paid exactly the same annual dividend of $1.77 a share. In​ addition, the future annual rate of growth in dividends for each of the three companies has been estimated as​ follows:

Buggies-Are-Us: g = 0 (i.e., dividends are expected to remain at $1.77/share)

Steady Freddie, Inc: g = 7% (for the foreseeable future)

Gang Buster Group:

Year 1	$1.99
Year 2	$2.24
Year 3	$2.52
Year 4	$2.83
Year 5 and beyond	g = 7%

Assume also that as the result of a strange set of​ circumstances, these three companies all have the same required rate of return ​(r = 11%).

(for all answers round to the nearest cent)

a. For​ Buggies-Are-Us, the value of the​ company's common shares is $_____.

For Steady​ Freddie, Inc., the value of the​ company's common shares is $_____.

For Gang Buster Group, the value of the company's common shares is $_____.

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

A. The value of​ Buggies-Are-Us is ​$16.09​, compared to ​$47.25 for Steady​ Freddie, Inc., and ​$57.22 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 7% forever, whereas Gang Busters​ Group's dividends grow at approximately​ 12% for the first four years and 11% 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 ​$16.09, compared to ​$47.25 for Steady​ Freddie, Inc., and $57.22 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 7% forever; whereas Gang Busters​ Group's dividends grow at approximately​ 12% for the first four years and 7% 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

Reasons are already given so let me help you with calculation of share price
Buggies
Dividend	1.77
Interest	11%
Share Price=	1.77/11%
Share Price=	16.09
Steady Fredie
Dividend	1.77
Interest	11%
growth	7%
Share Price=	1.77*(1+7%)/(11%-7%)
Share Price=	47.35

Year		Dividend	PV factor	Present Values
1		1.9900	0.900901	1.79
2		2.2400	0.811622	1.82
3		2.5200	0.731191	1.84
4		2.8300	0.658731	1.86
4		75.702	0.658731	49.87
			Total PV	57.18
Current Dividend	2.8300
Rate of return	11.00%
Growth Rate	7.00%
Horizon value	=Current Dividend*(1+Growth rate)/(Rate of return-Growth Rate)
	'2.83*(1+0.07)/(0.11-0.07)
	75.702
Total PV of 57.18 is the solution.