Question

Donuts Delite just paid an annual dividend of $1.10 a share. The firm expects to increase this dividend by 8 percent per year the following three years and then decrease the dividend growth to 2 percent annually thereafter. Which one of the following is the correct computation of the dividend for year 5?

a. ($1.10) (1.08 x 3) (1.02 x 4)
b. ($1.10) (1.08)^3(1.022)^3
c. ($1.10) (1.08)^3(1.022)^2
d. ($1.10) (1.08)^3(1.022)^4
e. ($1.10) (1.08 x 3) (1.02 x 3)

Answer 1

option C

Step-by-step explanation:

given,

annual dividend = $1.10

increase of dividend = 8 % for time t = 3 years

increase of dividend = 2 % for time t = 5 - 3 = 2 years

dividend computation for 5 years:

=
`\$ 1.10 * (1+(8)/(100))^3* (1+(2)/(100))^2`

=
`\$ 1.10 * (1+0.08)^3* (1+0.02)^2`

=
`\$ 1.10 * (1.08)^3* (1.02)^2`

the correct answer is option C