Question

We have valued shares assuming annual dividends. What would be the price of Company XZ if, instead of paying dividends of $3 per year, it pays dividends of $0.75 at the end of each quarter? The cost of the share, as well as the present value of future dividends, will be affected by this change in the dividend payment frequency. To determine the new share price, you would need to reevaluate the dividend discount model, taking into account the quarterly dividend payments and the applicable discount rate.

Answer 1

The student's question concerns recalculating the share price of Company XZ after changing from annual to quarterly dividends using Present Discounted Value. The 15% interest rate must be applied to discount the quarterly dividends to their present value, and then the total PDV is divided by the number of shares to determine the share price.

Step-by-step explanation:

The student is asking about the valuation of shares with a change from an annual dividend to quarterly dividend payments using the Present Discounted Value (PDV) method. To accurately determine the new share price of Company XZ with dividends of $0.75 at the end of each quarter, one must consider the quarterly dividend payments and adjust the dividend discount model accordingly. The calculation involves finding the present value of each future dividend payment discounted back to the present value at the required rate of return (the given interest rate of 15% in this case), then summing all those present values to get the total PDV of expected dividends. Finally, to find the price per share, the PDV of total profits would be divided by the number of shares.

For instance, if the total PDV of Company XZ is 51.3 million and there are 200 shares, then the price per share is calculated as follows:

51.3 million / 200 = 0.2565 million or $256,500 per share.

Keep in mind that expected profits used in this model are estimates and could vary from actual future amounts.