Most corporations pay quarterly dividends on their

common stock 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

quarterly installments to its shareholders.

a. Suppose a company currently pays an annual dividend of $2.20 on its

common stock in a single annual installment, and management plans on

raising this dividend by 6 percent per year indefinitely. If the required

return on this stock is 12 percent, what is the current share price?

b. Now suppose the company in part (a) actually pays its annual

dividend in equal quarterly installments; thus, the company has just

paid a dividend of $.55 per share, as it has for the previous three

quarters. What is your value for the current share price now? (Hint:

Find the equivalent annual end-of-year dividend for each year.)

Comment on whether you think this model of stock valuation is

appropriate.