23. Stock Valuation [LO1] Most corporations pay quarterly dividends on their common stock rather than annual dividends. Barring any unusual circumstances during the year, the board raises, lowers, or maintains the current dividend once a year and then pays this dividend out in equal quarterly installments to its shareholders. a. Suppose a company currently pays a $3.20 annual dividend on its common stock in a single annual installment, and management plans on raising this dividend by 6 percent per year indefinitely. If the required return on this stock is 12 percent, what is the current share price? b. Now suppose the company in (a) actually pays its annual dividend in equal quarterly installments; thus, the company has just paid a $0.80 dividend per share, as it has for the previous three quarters. What is your value for the current share price now? (Hint: Find the equivalent annual end-of-year dividend for each year.) Comment on whether you think this model of stock valuation is appropriate.
23. Stock Valuation [LO1] Most corporations pay quarterly dividends on their common stock rather than annual dividends. Barring any unusual circumstances during the year, the board raises, lowers, or maintains the current dividend once a year and then pays this dividend out in equal quarterly installments to its shareholders. a. Suppose a company currently pays a $3.20 annual dividend on its common stock in a single annual installment, and management plans on raising this dividend by 6 percent per year indefinitely. If the required return on this stock is 12 percent, what is the current share price? b. Now suppose the company in (a) actually pays its annual dividend in equal quarterly installments; thus, the company has just paid a $0.80 dividend per share, as it has for the previous three quarters. What is your value for the current share price now? (Hint: Find the equivalent annual end-of-year dividend for each year.) Comment on whether you think this model of stock valuation is appropriate.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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![23. Stock Valuation [LO1] Most corporations pay quarterly dividends on their
common stock rather than annual dividends. Barring any unusual circumstances
during the year, the board raises, lowers, or maintains the current dividend once
a year and then pays this dividend out in equal quarterly installments to its
shareholders.
a. Suppose a company currently pays a $3.20 annual dividend on its common stock
in a single annual installment, and management plans on raising this dividend by
6 percent per year indefinitely. If the required return on this stock is 12 percent,
what is the current share price?
b. Now suppose the company in (a) actually pays its annual dividend in equal
quarterly installments; thus, the company has just paid a $0.80 dividend per
share, as it has for the previous three quarters. What is your value for the current
share price now? (Hint: Find the equivalent annual end-of-year dividend for
each year.) Comment on whether you think this model of stock valuation is
appropriate.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F3196e4ab-e235-4496-956d-e3d5aa726ff3%2F7bcb6763-ff4c-489d-9834-109d0d8bbb5b%2F86p2bm.jpeg&w=3840&q=75)
Transcribed Image Text:23. Stock Valuation [LO1] Most corporations pay quarterly dividends on their
common stock rather than annual dividends. Barring any unusual circumstances
during the year, the board raises, lowers, or maintains the current dividend once
a year and then pays this dividend out in equal quarterly installments to its
shareholders.
a. Suppose a company currently pays a $3.20 annual dividend on its common stock
in a single annual installment, and management plans on raising this dividend by
6 percent per year indefinitely. If the required return on this stock is 12 percent,
what is the current share price?
b. Now suppose the company in (a) actually pays its annual dividend in equal
quarterly installments; thus, the company has just paid a $0.80 dividend per
share, as it has for the previous three quarters. What is your value for the current
share price now? (Hint: Find the equivalent annual end-of-year dividend for
each year.) Comment on whether you think this model of stock valuation is
appropriate.
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