Question

Michigan Co. just paid a dividend of $2 per share. Analysts expect future dividends to grow at 20 percent per year for the next four years and then grow at 6 percent per year thereafter. Calculate the expected dividend in year 5.

a. $2.95
b. $3.81
c. $4.40
d. $4.15

Answer 1

To calculate the expected dividend in year 5, we start with the dividend paid in year 0 and calculate the dividends for the next four years using a growth rate of 20 percent per year. Then, we use a growth rate of 6 percent per year for year 5 and beyond. The expected dividend in year 5 is $4.40 per share.

Step-by-step explanation:

To calculate the expected dividend in year 5, we need to calculate the dividends for the next four years and then use the growth rate of 6 percent per year thereafter.

First, we start with the dividend paid in year 0, which is $2 per share.

Next, we calculate the dividends for the next four years using the growth rate of 20 percent per year.

Year 1: $2 * (1 + 0.20) = $2.40

Year 2: $2.40 * (1 + 0.20) = $2.88

Year 3: $2.88 * (1 + 0.20) = $3.46

Year 4: $3.46 * (1 + 0.20) = $4.15

Finally, we use the growth rate of 6 percent per year for year 5 and beyond.

Year 5: $4.15 * (1 + 0.06) = $4.40

Therefore, the expected dividend in year 5 is $4.40 per share.