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 a $2.50 annual dividend on its common stock in a single annual installment, and management plans on raising this dividend by 8 percent per year, indefinitely. If the required return on this stock is 14 percent, what is the current share price?Now suppose that the company in () actually pays its annual dividend in equal quarterly installments; thus, this company has just paid a $.625 divi-dend 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 or not you think that this model of stock valuation is appropriate.Warf Co. just paid a dividend of $4.00 per share. The company will increase its dividend by 20 percent next year and will then reduce its dividend growth rate by 5 percentage points per year until it reaches the in-dustry average of 5 percent, after which the company will keep a constant growth rate, forever. If the required return on Warf stock is 13 percent, what will a share of stock sell for today?This one’s a little harder. Suppose the current share price for the firm in the previous problem is $104.05 and all the dividend infor-mation remains the same. What required return must investors be demanding on Warf stock? (Hint: Set up the valuation formula with all the relevant cash flows, and use trial and error to find the unknown rate of return.)A drawback of the dividend growth model is the need to estimate the growth rate of dividends. One way to estimate this growth rate is to use the sustainable growth rate. Look back at Chapter 4 and find the formula for the sustainable growth rate. Using the annual income statement and balance sheet, calculate the sustainable growth rate for the Kel-logg Company (K). Find the most recent closing monthly stock price under the “Mthly. Adj. Prices” link. Using the growth rate you calculated, the most recent dividend per share, and the most recent stock price, calculate the required return for Kellogg’s shareholders. Does this number make sense? Why or why not?
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