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A company that just paid a dividend of $2
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
Expert Solution
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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