P8.15 Assume there are three companies that in the past year paid exactly the same annual div- idend of $2.25 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 Steady Freddie, Inc. g = 6% Gang Buster Group Year 1 $2.53 are expected (for the foreseeable 2 $2.85 3 $3.20 to remain at future) 4 $3.60 $2.25/share) Year 5 and beyond: g = 6%

Assume also that as the result of a strange set of circumstances, these three companies all have the same required rate of return (k = 10%).

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?