Question

Each quarter, a company pays a dividend on its perpetual preference share. Today, the share is selling at $27.10. If the required rate of return for such shares is 7.9 percent p.a. compounding quarterly, what is the quarterlydividend paid by this company? (to the nearest cent; don’t include $ sign)

Answer 1

Required Rate of Return = 7.9% Compounded Quaterly.

Therefore Quaterly Rate of Return = 7.9% / 4 Quarters = 1.975%

Now, the price of the share is given = $ 27.10

Since the Dividends are paid quaterly and are perpetually paid. therefore the value of the share can be derived using the below formula

Price of Share = Dividend Amount Quaterly/ Quaterly Rate of Return

Therefore we have  

Dividend Amount Quaterly = Price of Share x Quaterly Rate of Return

Dividend Amount Quaterly = 27.10 * 1.975% = 0.53225