Question

Assume there are three companies that in the past year paid exactly the same annual dividend of ​$1.52 a share. In​ addition, the future annual rate of growth in dividends for each of the three companies has been estimated as​ follows: (attached). Assume also that as the result of a strange set of​ circumstances, these 3 companies all have the same req. rate of return =11%

​).

Buggies-Are-Us g = 0 (i.e., dividends are expected to remain at $1.52/share) Steady Freddie, Inc g = 6% (for the foreseeable future) G ang Buster Group Year 1 $1.71 Year 2 $1.92 Year 3 $2.16 Year 4 $2.43 Year 5 and beyond: g = 6%

A. Use the appropriate DVM to value each of these companies. (round each to the nearest cent)

For​ Buggies-Are-Us, the value of the​ company's common shares is (blank$) ?

For Steady​ Freddie, Inc., the value of the​ company's common shares is (blank$) ?

For Gang Buster​ Group, the value of the​ company's common shares is (blank$) ?

What is the major cause of the differences among these three​ valuations? (multiple choice)

A. The value of​ Buggies-Are-Us is ​$13.82 compared to ​$32.20 for Steady​ Freddie, Inc., and ​$40.27 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 6​% ​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 ​$13.82 compared to ​$32.20 for Steady​ Freddie, Inc., and ​$40.27 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 6​% ​forever; whereas Gang Busters​ Group's dividends grow at approximately​ 12% for the first four years and 6​% 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

20 Rege Rate of Returen = 11% - te Value of Company, using Dividend Valuation Model 24 buggies -are-us Do = $1.52 Value of Company & Polity 052, = $13.82 b) Steady Freddie, inc Value of Company & Lolitg) Keg - 105211006 Oull-0.06 - $32022

& 1 Gang Buster Group Year dir PVF @ 11%. | PUF ADV $17110.901_ 21:54L 2 $1.92 10811 $ 20557 5 $2.16 0.7L 8 1.579 $2.43 0.659 I $1.60L $ 60278 | Value oz.Company (T5) -$243(1.06) 0.11 -0.06 - 7 $51.516, Value of Company (To) -16510516 + $6•278 Clailly 3) $33694+$ 6278 = $40.21

Multiple Choice Answer - Option B . Value of af Buggies-au-us - $13.82 5 daddy Freddie - $32:20 of Gang Bustur Group - $40.27 quowth voule __6% Forever 12% - 1-4 years 16%.- aftel 4 years