Question

A company paid dividends of $0.74 last year and are due to pay dividends again today.
Today's dividends will be 4.1% higher than last year's. It is expected that this dividend payment amount will remain for the life of the business.

The shares of this company currently return 18.6% per annum to shareholders.

Based on this information, calculate the share price (p) for the company immediately after today's dividends are paid.

Answer 1

Answer:

Information given: Last paid dividend(D₀) = $.74, Growth rate(g) = 4.1%, Return(r) = 18.6%, Share price(P₀) = ?

As per Constant growth model: Dividend grows by a constant growth rate every year.

Formula: P₀ = D₁ / (r-g)

Step 1: Calculating D₁

D₁ = D0 (1+g)

D₁ = .74 (1+.041)

D₁ = .77034 or $.77

Step 2: Calculating P₀

P₀ =.77034 / (.186 - .041)

P₀ = $5.31

Stock price after paying cash dividend of $.77034 is $4.54 (5.31-.77)

Stock price decreases by the amount of cash dividend paid.