S$08-33$ 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.

a$.$ Suppose a company currently pays an annual dividend of $$3\mathrm{.}60$ on its common stock

in a single annual installment, and management plans on raising this dividend by $3\mathrm{.}4$

percent per year indefinitely. If the required return on this stock is $10\mathrm{.}5$ percent, what is

the current share price? $($Do not round intermediate calculations and round your

answer to $2$ decimal places, e$.$g$.,32\mathrm{.}16.)$

b$.$ Now suppose the company in $($a$)$ actually pays its annual dividend in equal quarterly

installments; thus, the company has just paid a dividend of $$\mathrm{.}90$ 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.$)($Do not round

intermediate calculations and round your answer to $2$ decimal places, e$.$g$.,32\mathrm{.}16.)$