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Dividends Set Annually Suppose that a firm always announces a yearly dividend at the end...

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Finance

Dividends Set Annually

Suppose that a firm always announces a yearly dividend at the end of the first quarter of the year, but then pays the dividend out as four equal quarterly payments. If the next such annual dividend has been announced as $6, it is exactly one quarter until the first quarterly dividend from that $6, the effective annual required rate of return on the companys stock is 12 percent, and all future annual dividends are expected to grow at 4 percent per year indefinitely, how much will this stock be worth?

Since dividends come quarterly, first convert the 12 percent into an effective quarterly rate, then EAR:

image

Use the annuity equation or App, to calculate the present value of the first years dividends. It will be the present value of a four-period annuity with payments of $1.

Using this Dividend, we can value the stocks dividends as the present value of a growing perpetuity due:

image

iquarterly 1+i-1 = PV PV (Do) [(Pv (Do))/(/-9)] iquarterly 1+i-1 = PV PV (Do) [(Pv (Do))/(/-9)]

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