Question

After paying a dividend of $1.90 last year, a company does not expect to pay a dividend for the next year. After that it plans to pay a dividend of 5.71 in year 2 and then increase the dividend at a rate of 3 percent per annum in years 3 to 6. What is the expected dividend to be paid in year 3? (to nearest cent; don't include $ sign)

Answer 1

The expected dividend to be paid in year 3 is $5.88, after applying a 3% growth rate to the year 2 dividend of $5.71.

Step-by-step explanation:

The expected dividend to be paid by a company in year 3 can be calculated based on the information given about the dividends for the previous years and the growth rate. If the company paid a dividend of $5.71 in year 2 and expects to increase the dividend at a rate of 3 percent per annum, then the year 3 dividend can be found by multiplying the year 2 dividend by 1 plus the growth rate (expressed as a decimal).

To calculate the year 3 dividend:

Identify the dividend paid in year 2: $5.71Determine the growth rate: 3%

Convert the growth rate to decimal form: 3% = 0.03

After rounding to the nearest cent, the expected dividend to be paid in year 3 is $5.88.