2. Equity 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 main- tains 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 percent per year indefinitely. If the required return on this equity is 14 percent, what is the current share price? 1 (b) Now suppose that the company in (2a) 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 end-of-year dividend for each year. Assume the dividends grew by 6 percent every six months.) Comment on whether you think that this model of share valuation is appropriate