Suppose a company currently pays an annual dividend of $2.80 on its common stock in a single annual installment, and management plans on raising this dividend by 6% per year indefinitely.

Q1) If the required return on the stock is 12%, what is the current share price?

The current share price is $49.46. =$2.80 (1+0.06) / (0.12-0.06)

=$2.80 x 1.06 /0.06

= $ 49.46

Now suppose the company pays its annual dividend in equal quarterly installments: the company has just paid a dividend of $.70 per share, as it has for the previous three quarters.

Q2) What is your value for the current share price now?

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