a.
Adequate information:
Current dividend per period (D0) = $3.80
Growth rate of dividend (g) = 4.5%
Required
To determine: Current price of the stock
Introduction: The dividend growth model computes the stock price with the help of the growth rate, required rate, and dividend for the next period.
b.
Adequate information:
Frequency of payments in a year = 4
Current dividend per period (D0) = $3.80
Growth rate of dividend (g) = 4.5%
Required rate of return (R) = 11%
To determine: Current price of the stock. Also, determine whether this model of stock valuation is appropriate or not.
Introduction: The dividend growth model computes the stock price with the help of the growth rate, required rate, and dividend for the next period.
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CORPORATE FINANCE
- 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. Suppose a company currently pays an annual dividend of $3.00 on its common stock in a single annual installment, and management plans on raising this dividend by 6.25 percent per year, indefinitely. If the required return on this stock is 9 percent, what is the current share price? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. Now suppose the company in part (a) actually pays its annual dividend in equal quarterly installments; thus, the company has just paid a dividend of $.75 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…arrow_forwardSome Public Companies may pay quarterly dividends on their common stock ratherthan annual dividends. The Board of Directors as dictated by cash flows can adjust or maintain the currentdividend once a year or pays a dividend based on quarterly installments to its shareholders.a) Joe Giant PLC currently pays a dividend of $4.88 on its common stock in one single annual installment. CEO of Joe’s, Mr. Jim Davis, plans on raising this dividend by 3.5% percent per year for the conceivable future. If the required return on this stock is 8.60 percent, what is the current share price? b) On the contrary, if Joe Giant PLC pays its yearly dividend in equal quarterly installments, as it has for the previous three quarters; What is your value for the current share price now? PLEASE ANSWER PART Barrow_forwardDividends 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 company’s 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: iquarterly = √?+??−? Use the annuity equation or App, to calculate the present value of the first year’s dividends. It will be the present value of a four-period annuity with payments of $1.50. Using this Dividend, we can value the stock’s dividends as the present value of a growing perpetuity due: PV = PV (D0) + [(PV (D0))/(i – g)]arrow_forward
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