Most corporations pay quarterly dividends on their common stock more willingly than annual dividends. Barring any unusual circumstances throughout the year, the board raises, lowers, or maintains the current dividend once a year and then pays this dividend out in equal quarterly instalments to its shareholders.
(a) Assume a company currently pays an annual dividend of $5.40 on its common stock in a single annual instalment, and management plans on increasing this dividend by 6.75 percent per year indefinitely. If the required return on this stock is 10 percent, what is current share price?
(b) Now assume the company in (a) actually pays its annual dividend in equal quarterly instalments; thus, the company has just paid the dividend of $1.35 per share, as it has for the previous three quarters. What is your value for current share price now? (Hint: Find the equivalent annual end-of-year dividend for each year.)