2. 33.

Share valuation [LO 8.1] Most companies pay half-yearly dividends on their ordinary shares 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 halfyearly instalments to its shareholders.

1. Suppose a company currently pays an annual dividend of $3.40 on its ordinary shares in a single annual instalment and management plans on raising this dividend by 3.8 per cent per year indefinitely. If the required return on the shares is 10.5 per cent, what is the current share price?

2. Now suppose the company in

(a) actually pays its annual dividend in equal half-yearly instalments; thus, the company has just paid a dividend of $1.70 per share, as it did for the previous half-year. What is your value for the current share price now? (Hint: Find the equivalent annual end-ofyear dividend for each year.) Comment on whether you think this model of share valuation is appropriate.