Most corporations pay semi-annual rather than annual dividends on their equity. Barring any unusual circumstances during the
Question:
Most corporations pay semi-annual rather than annual dividends on their equity. 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 biannual instalments to its shareholders.
(a) Suppose a company currently pays a €3.00 annual dividend on its equity in a single annual instalment, and management plans on raising this dividend by 6 per cent per year indefinitely. If the required return on this equity is 14 per cent, what is the current share price?
(b) Now suppose that the company in
(a) actually pays its annual dividend in equal 6-
monthly instalments; thus this company has just paid a £1.50 dividend per share, as it has in the previous 6 months. What is the current share price now? (Hint: Find the equivalent annual end-of-year dividend for each year. Assume the dividends grew by 6 per cent every 6 months.) Comment on whether you think that this model of share valuation is appropriate.
Step by Step Answer:
Corporate Finance
ISBN: 9780077173630
3rd Edition
Authors: David Hillier, Stephen A. Ross, Randolph W. Westerfield, Bradford D. Jordan, Jeffrey F. Jaffe