Most corporations pay quarterly dividends on their common stock rather than annual dividends. Barring any unusual...

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Finance

Most corporations pay quarterly dividends on their common stockrather than annual dividends. Barring any unusual circumstancesduring the year, the board raises, lowers, or maintains the currentdividend once a year and then pays this dividend out in equalquarterly installments to its shareholders.

a. Suppose a company currently pays an annualdividend of $5.00 on its common stock in a single annualinstallment, and management plans on raising this dividend by 6.25percent per year indefinitely. If the required return on this stockis 9 percent, what is the current share price? (Do notround intermediate calculations and round your answer to 2 decimalplaces, e.g., 32.16.)

Current share price           $

b. Now suppose the company in part (a) actuallypays its annual dividend in equal quarterly installments; thus, thecompany has just paid a dividend of $1.25 per share, as it has forthe previous three quarters. What is your value for the currentshare price now? (Hint: Find the equivalent annualend-of-year dividend for each year.) (Do not roundintermediate calculations and round your answer to 2 decimalplaces, e.g., 32.16.)

Current share price           $

Answer & Explanation Solved by verified expert

3.7 Ratings (602 Votes)

Answer a Current share price 6944 Working Current share price Perpetual annual dividend required return 625 9 6944 Answer B Current share price 7175 Working See Answer

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Most corporations pay quarterly dividends on their common stockrather than annual dividends. Barring any unusual circumstancesduring the year, the board raises, lowers, or maintains the currentdividend once a year and then pays this dividend out in equalquarterly installments to its shareholders.a. Suppose a company currently pays an annualdividend of $5.00 on its common stock in a single annualinstallment, and management plans on raising this dividend by 6.25percent per year indefinitely. If the required return on this stockis 9 percent, what is the current share price? (Do notround intermediate calculations and round your answer to 2 decimalplaces, e.g., 32.16.) Current share price $b. Now suppose the company in part (a) actuallypays its annual dividend in equal quarterly installments; thus, thecompany has just paid a dividend of $1.25 per share, as it has forthe previous three quarters. What is your value for the currentshare price now? (Hint: Find the equivalent annualend-of-year dividend for each year.) (Do not roundintermediate calculations and round your answer to 2 decimalplaces, e.g., 32.16.) Current share price $