Answer the following questions with complete solutions:

1. Consider the following three companies: i Company A is expected to pay a dividend of $5 forever. ii Company B is expected to pay a dividend of $2 next year, and after that the annual dividend is expected to grow by 3% each year. iii Company C is expected to pay a dividend of $3 next year and this dividend will grow at 5% for three years. After year 4 the dividends will grow at 2% forever. Assume the cost of equity for each of these companies is 8%. Which company has the highest present value? Does your answer change if the appropriate cost of equity is 10%?

2.

FIGURE 8.10 Total assets, book value and market value of equity, equity beta and analysts' consensus earnings forecasts for CSL, Woolworths and Xero CSL Woolworths Xero Total assets ($m) 17 559 23 491 929 Shareholders' equity ($m) Book value 7 488 10 669 338 Market value 97 425 41 826 6829 Equity beta 1.15 0.56 2.32 Analyst forecast of next year's 3076 1826 14 earnings ($m)