Question

Assume there are three companies that in the past year paid exactly the same annual dividend of $2.18 a share. In addition, the future annual rate of growth in dividends for each of the three companies has been estimated as follows: : 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? X Pearest cent.) i Data Table (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 g=0 (i.e., dividends are expected to remain at $2.18/share) Steady Freddie, Inc g = 9% (for the foreseeable future) Gang Buster Group Year 1 $2.45 Year 2 $2.76 Year 3 $3.10 Year 4 $3.49 Year 5 and beyond: g = 9%

(Round to the nearest cent)

Answer 1

a.

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

2 a. $2.18 Buggies-Are-Us Last dividend Growth rate (g) Required rate of return 0% 14% Value of a share $15.57 10 11 12 Steady Freddie, Inc Last dividend Growth rate (g) Required rate of return $2.18 9% 14% 14 Value of a share $47.52 15 Gang Buster Group Last dividend Year $2.18 Dividend $2.45 $2.76 2 3 4 Growth rate (g) beyond year-4 Required rate of return Terminal value at end of year 4 Value of a share $3.10 $3.49 $3.80 9% 14% $76.08 $53.48 28 29 20

Cell reference -

В -NM a. 2.18 Buggies-Are-Us Last dividend Growth rate (g) Required rate of return 0.14 Value of a share =C3/C5 2.18 Steady Freddie, Inc Last dividend Growth rate (g) Required rate of return 11 12 0.09 0.14 13 14 Value of a share =(C10*(1+C11)/(C12-C11) 15 16 Gang Buster Group Last dividend Year 2 14 2.18 Dividend 2.45 2.76 3.1 3.49 =C23*(1+C25) 0.09 0.14 =C24/(C26-C25) |=NPV(C26,C20:C23)+C27/(1+C26)^4 Growth rate (g) beyond year-4 Required rate of return Terminal value at end of year 4 Value of a share

b.

Among three companies, Gang Buster has highest intrinsic value and Buggies lowest intrinsic value.

The main cause of the difference amount there three companies valuation is Growth opportunity.

Buggies has no growth opportunity thus it has lowest value.

Steady has constant growth rate thus it has higher value

Gang Buster has higher growth rate for initial 4 years then constant growth rate of 9% thus, it has highest value.

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.