Problem 7-32 Stock Valuation [LO 1]

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.

Suppose a company currently pays an annual dividend of $2.40 on its common stock in a single annual installment, and management plans on raising this dividend by 6.5 percent per year, indefinitely. If the required return on this stock is 8 percent, what is the current share price?

Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.

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 $.60 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.)