Assume there are three companies that in the past year paid exactly the same annual dividend of ?$1.75 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= 4% year 1 $1.97
g? = 0 (for the foreseeable future) year 2 2.22
?(i.e., dividends are expected to remain at 1.75/share) year 3 2.50
year 4 2.81
year 5 and beyond: 9 = 4%
Assume also that as the result of a strange set of? circumstances, these three companies all have the same required rate of return
?(r? =7?%).
a. Use the appropriate DVM to value each of these companies.
b. Comment briefly on the comparative values of these three companies. What is the major cause of the differences among these three? valuations?
a. For? Buggies-Are-Us, the value of the? company's common shares is ?$. ?(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.)