1. A person is considering buying the stock of two home health
companies that are similar in all respects except for the proportion of
earnings paid out as dividends. Both companies are expected to earn $6 per share
in the coming year, but Company D (for dividends) is expected to pay out the
entire amount a dividends, while Company G (for growth) is expected to pay out
only one-third of its earnings, or $2 per share. The companies are equally
risky, and their required rate ofreturn is 15 percent. D's constant growth rate
is zero, and G's is 8.33 percent. What are theintrinsic values of Stocks D and
Saturday, February 13, 2016
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