Assume there are three companies that in the past year paid exactly the same annual dividend of $2.79 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 (requals8 %).

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.)

A.

The value of Buggies-Are-Us is $34.88, compared to $97.67 for Steady Freddie, Inc., and $127.03 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 5% forever, whereas Gang Busters Group's dividends grow at approximately 12% for the first four years and 8% 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 $34.88, compared to $97.67 for Steady Freddie, Inc., and $127.03 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 5% forever; whereas Gang Busters Group's dividends grow at approximately 12% for the first four years and 5% 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.

Buggies- Are-Us	Steady Freddie, Inc	Gang Buster Group
g = 0	g = 5%	Year 1	$3.14
(i.e. dividends are expected to remain at $2.79/share	(for the foreseeable future)	2	$3.53
		3	$3.97
		4	$4.46
		Year 5 and beyond: g = 5%