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# Stock Price based on dividends

Stock Valuation

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. (Round your answers to 2 decimal places, e.g. 32.16.)

a. Suppose a company currently pays a \$6 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 14 percent, the current share price is \$ .

b. Now suppose that the company in (a) actually pays its annual dividend in equal quarterly installments; thus this company has just paid a \$1.5 dividend per share, as it has for the previous three quarters. The value for the current share price is now \$ . (Hint: Find the equivalent annual end-of-year dividend for each year.)

#### Solution Preview

Share Price = Annual Dividend / ( discount rate - dividend growth rate)

a. ...

\$2.19