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 $4.00 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 15 percent, what is the current share price?

Question

Jenna Wells

Business

14 June, 11:07

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 $4.00 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 15 percent, what is the current share price?

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Answers (1)

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Jaycee Coleman · Answer 1

The DDM tells us that share price = D * (1+G) / R-G

Dividend = 4.00

G = 0.05

R = 0.15

Price = 4 * (1.05) / 0.15-0.05

Price = $42

Explanation:

We use the dividend discount method to estimate the current price. We use the growth rate and required return to figure out the current price by using the DDM formula.