Most corporations pay quarterly dividends on their common stock rather than annualdividends. 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 equalquarterly installments to its shareholders.a. Suppose a company currently pays an annual dividend of $410 on its common stockin a single annual installment, and management plans on raising this dividend by 4percent per year indefinitely. If the required return on this stock is 14 percent, what isthe current share price? (Do not round intermediate calculations and round youranswer to 2 decimal places, e.g., 32.16.)b. Now suppose the company in (a) actually pays its annual dividend in equal quarterlyinstallments; thus, the company has just paid a dividend of $1.025 per share, as it hasfor 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 roundintermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)a. Current share priceb. Current share price42.64

Part (a)D0 = $4.10; Ke = 14%; Dividend growth rate = g = 4%D1 = D0 x (1 + g) = 4.10 x (1 + 4%) =…

Answered: Most corporations pay quarterly…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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The Digital Electronic Quotation System (DEQS) Corporation pays no cash dividends currently and is not expected to for the next five years. Its latest EPS was $17.00, all of which was reinvested in the company. The firm's expected ROE for the next five years is 15% per year, and during this time it is expected to continue to reinvest all of its earnings. Starting in year 6, the firm's ROE on new investments is expected to fall to 10%, and the company is expected to start paying out 20% of its earnings in cash dividends, which it will continue to do forever after. DEQS's market capitalization rate is 26% per year. Required: a. What is your estimate of DEQS's intrinsic value per share? b. Assuming its current market price is equal to its intrinsic value, what do you expect to happen to its price over the next year? c. What do you expect to happen to price in the following year? d. What is your estimate of DEQS's intrinsic value per share if you expected DEQS to pay out only 15% of…

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