5. Suppose a company currently pays an annual dividend of $2.80 on its common stock in a single annual
installment, and management plans on raising this dividend by 6% per year indefinitely.
If the required return on is 12%, what is the current share price?
Now suppose the company actually pays its annual dividend in equal quarterly installments: thus, the company has just paid a dividend of $.70 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 you think this model for stock valuation is appropriate?
Dividend per share= 2.80