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What is applicable discount rate for a period of one quarter

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Question - Today is November15, 2020. U.S.-based company Hamburgler Lukewarm pays 4 equal quarterly dividends before increasing the dividend in the following fiscal year by 4.0% (keeping it constant for 4 payments) and so on. It will pay its next dividend of $0.51 on February 15 (exactly one quarter from now) and keep the dividend at that level for another 3 quarters. The discount rate is 13.900% (EAR). Your goal is to compute the share price. What is the applicable discount rate for a period of one quarter?

Path 1: 1) Compute the future value of the next 4 quarterly dividends in exactly one year from now. This way, you can pretend that the firm pays one large end-of-year dividend. The future value of the next 4 dividends is:

2) Based on this equivalent dividend, compute the share price.

Alternative path 2:

1) First, compute the present value of all future dividends in November:

2) Next, compute today's value of all future dividends paid in the month of February:

3) In the same way, the present value of all May dividends today is:

4) And the present value of all August dividends today is:

Reference no: EM132765396

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