FIN 340 5-2 Quiz
1. Assume the three companies has been estimated as follows returnr=9%
exactly the same annual dividend of $1.35 a share.In addition,the future annual rate of growth in dividends for each of
also that as the result of a strange set of circumstances, these three companies all have the
ired rate of
b. Comment briefly on the comparative values of these three companies. What is the major cause of the differenc
a.For Buggie
es 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.)
O A. The value of Buggies-Are-Us is $15.00, compared to $28.00 for Steady Freddie, Inc., and $37.73 for Gang Busters Group. The difference in values is caused by the liference 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 4% foreverwhereas four years and 4% from year five to the foreseeable future. The higher growth in
nt rate o
Buggies-Are-Us g=0 (i.e., dividends are expected to remain at $1.35/share)
Steady Freddie, Inc g = 4% (for the foreseeable future)
Gang Buster Group Year 1 $1.52 Year 2 $1.71 Year 3 $1.92 Year 4 $2.16 Year 5 and beyond: g = 4%
Buggies-R-Us Value of a share of stock = 1.35/ .09 = $15 Steady Freddie: D1 = 1.35* (1+ .04) = 1.404 Value of a share of stock= 1.40/ (0.09-0.04) = $28 Gang Buster Group: Financial calc = 0 CFO 1.52 CO1 1.71 CO2 1.92 CO3 9 I CO4: D5 =2.16* (1+0.04) =S2.25 value of a share of stock = 2.25/ (0.09-0.06) = $75 cash flow for yr 4 = 75+ 2.16 = 77.16 = CO4 Solve for NPV = 37.73 b. The value of Buggies-Are-Us is $15.00, compared to $28.00 for Steady Freddie, Inc., and $37.73 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 4% forever, whereas Gang Busters Group's dividends grow at approximately 12% for the first four years and 4% 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.
2.
Wilbur and Orville are brothers. They're both serious investors, but they have different approaches to valuing stocks. Wilbur, the older brother, likes to use the dividend valuation model. Orville prefers the free cash flow to equity valuation model. As it turns out, right now, both of them are looking at the same stock--Wright