Question

Otobai Motor Company just paid a dividend of $1.40. Analysts expect its dividend to grow at a rate of 18 percent for the next three years and then a constant rate of 5 percent thereafter. What is the expected dividend per share at the end of year 5?

a. $2.35.
b. $2.54.
c. $2.91.
d. $1.50.

Answer 1

b. $2.54.

Step-by-step explanation:

The computation of the expected dividend per share at the end of year 5 is shown below:

= Dividend per share × (1 + growth rate)^number of years × (1 + growth rate)^remaining years left

= 1.40 × (1+18%)^3 × (1 + 5%)^2

= $2.54

hence, the expected dividend per share at the end of year 5 is $2.54