Question
Assume there are three companies that in the past year paid exactly the same annual dividend of $1.85 a share. In addition, the future annual
Assume there are three companies that in the past year paid exactly the same annual dividend of $1.85 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 | Steady Freddie, Inc. | Gang Buster Group | |
---|---|---|---|
g=0g=0 (i.e., dividends are expected to remain at $1.85/share) | g=5%g=5% (for the foreseeable future) | Year 1 2 3 4 5 | $2.13 $2.45 $2.81 $3.24 $3.72 |
Year 5 and beyond: g=5%g=5% |
Assume also that as the result of a strange set of circumstances, these three companies all have the same required rate of return (r=12%).(r=12%).
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Use the appropriate DVM to value each of these companies.
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Comment briefly on the comparative values of these three companies. What is the major cause of the differences among these valuations?
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