Question
15. 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
15. 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 instalments to its shareholders
a. Suppose a company currently pays an annual dividend of $2.50 on its ordinary shares in a single annual instalment, and management plans on raising this dividend by 5% per year indefinitely. If the required return on this share is 13%, what is the current share price?
b. Now suppose the company in part a actually pays its annual dividend in equal half-yearly instalments; thus the company has just paid a $0.75 dividend per share, as it has for the past half-year. What is your value for the current share now? (Hint: find the equivalent end of-year dividend for each year.) Comment on whether you think this model of share valuation is appropriate.
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