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Homework answers / question archive / A company that just paid a dividend of $2

A company that just paid a dividend of $2

Finance

A company that just paid a dividend of $2.75 per share plans to increase its dividend by 14% next year. The company plans to then reduce its dividend growth rate by 4% each year until it reaches a dividend growth rate of 6%. The company is expected to then maintain a constant dividend growth rate of 6% forever. The required return on the stock is 12%. What is the dividend amount expected to be paid by this stock 3 years from now?

Round the final answer to 2 decimal places

 

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Computation of Dividend amount expected to be paid after 3 years:

Dividend growth for year 1 = 14%

Dividend growth for year 2 = 14% - 4% = 10%

Dividend growth for year 3 = 10% - 4% = 6%

Current Dividend = D0 = $2.75

Expected dividend next year = D1 = D0 * (1 + Growth for year 1)

= $2.75 * (1+14%)

= $3.135

 

D2 = $3.135 * (1+10%) = $3.4485

D3 = $3.4485 * 1.06 = $3.66

So, the dividend amount expected to be paid after 3 years is 3.66

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