Question

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 an annual dividend of $6.00 on its common stock in a single annual installment, and management plans on raising this dividend by 5 percent per year indefinitely. If the required return on this stock is 14 percent, what is the current share price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
b.	Now suppose the company in (a) actually pays its annual dividend in equal quarterly installments; thus, the company has just paid a dividend of $1.50 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.) (Do not round intermediate calculations and round your answ

Answer 1

For this, we'd use the gordon growth model, which is :-

So, the price is

P = 6 * (1+5%) / (14%-5%)

= 70 $ / Share

For part B, The annual dividend is divided into four quarters. Hence, multiplying the per quarter dividend by 4 we get $6 Value for the dividend in the current year. Hence, the intrinsic value for the stock price would be same in this case too, as all the numbers would be the same as in part a.