Consider the following two companies:

• Johnson Company:

EPS1 = $8 and expected dividend: Div1 = $6.50

It will maintain the same payout ratio forever

Johnson's dividends grow at 1% per year

• Harrison Corp.:

EPS1 = $3. Will not pay any dividend over next 5 years: Div1 through Div5 = 0

Earnings will grow at 15% per year to EPS6 = $6.034

Expected year 6 dividend: Div6 = 3.62 (60% payout ratio)

Subsequent dividends are expected to grow at 4% per year

Discount rate (both stocks): rE = 10%

a) How much would you pay for a share of Johnson Company?

b) How much would you pay for a share of Harrison Corp?

c) Does Johnson's growth create value for shareholders?

d) Does Harrison's growth create value for shareholders?