Thisyear, Midland Light and Gas(ML&G) paid its stockholders an annual dividend of $3.00 a share. A major brokerage firm recently put out a report onML&G predicting that thecompany's annual dividends should grow at the rate of 7% per year for each of the next seven years and then level off and grow at the rate of 3% a year thereafter. (Note: Use four decimal places for all numbers in your intermediatecalculations.)

a. Use thevariable-growth DVM and a required rate of return of 8.00% to find the maximum price you should be willing to pay for this stock.

b. Redo theML&G problem in part a, this time assuming that after year7, dividends stop growing altogether(for year 8 andbeyond, g=0). Use all the other information given to find thestock's intrinsic value.

c. Contrast your two answers and comment on your findings. How important is growth to this valuationmodel?

Assume there are three companies that in the past year paid exactly the same annual dividend of $1.55 a share. Inaddition, the future annual rate of growth in dividends for each of the three companies has been estimated asfollows:

. Assume also that as the result of a strange set ofcircumstances, these three companies all have the same required rate of return (r=12%).

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 threevaluations?

Buggies-Are-Us SteadyFreddie, Inc Gang Buster Group

g= 0 g= 8% Year 1 $1.74

(i.e., dividends (for the foreseeable Year 2 $1.96

future) Year 3 $2.20

are expected Year 4 $2.47

to remain at

$1.55/share) Year 5 and beyond : g = 8%