Share Valuation Most corporations pay semi-annual rather than annual dividends on their equity. Barring any unusual circumstances

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Share Valuation 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 six-monthly instalments; thus this company has just paid a €1.50 dividend per share, as it has in the previous six months. What is the current share price now? (Hint: Find the equivalent annual endof-year dividend for each year. Assume the dividends grew by 6 per cent every six months.)

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Fundamentals Of Corporate Finance

ISBN: 9780077178239

3rd Edition

Authors: David Hillier, Iain Clacher, Stephen A. Ross

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