Question
(1) Suppose a company just paid a dividend of $3.6. Its manager promises to pay annual dividend growing at 6% per year. If the required
(1) Suppose a company just paid a dividend of $3.6. Its manager promises to pay annual dividend growing at 6% per year. If the required return is 12% (in EAR), what would the current price be?
(2) Now assume the manager has decided to pay quarterly dividends instead of annual dividends. It has just paid a dividend of $0.9. The next dividend will be 3 months from now, with value equal to $0.9*(1.06)^1/4, and will grow at an annual rate of 6%. That is, each dividend payment will be 1.06^(1/4) times the previous one. What is the share price now?
(3) Now assume the dividend will grow more slowly at a rate of 2% per year from the 40th quarterly dividend. That is, the 41st dividend will be equal to the 40th dividend multiplied by (1.02)^1/4. What is the share price now?
Please answer the question using formulas, do not use excel or other techniques that are not allowed to use during a standardized test.
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