Question

2A. Firm ABC paid an annual dividend of $2.00 per share last year. Management just announced that future dividends will increase by 2 percent annually. What is the amount of the expected dividend in year 5? 2B. Firm ABC is going to pay an annual dividend of $2.00 per share next year. Management just announced that future dividends will increase by 2 percent annually. What is the amount of the expected dividend in year 5? 2C. Firm ABC is going to pay an annual dividend of $2.00 per share next year. Management just announced that future dividends will increase by 5 percent annually in the first two years and 2 percent annually afterwards. What is the amount of the expected dividend in year 5?

Answer 1

FV = $2.20

FV = $2.15

FV = $2.29

Step-by-step explanation:

given data

Annual dividend = $2

rate of interest = 2%

time period = 5

solution

we use here future value formula that is express as

FV = PV ×
`(1 + r)^t` .........................1

here FV is Future value and PV is Present value and r is rate and t is time

put here value and we get

FV = $2 ×
`(1 + 0.02)^5`

solve it we get

FV = $2.20

and

when Dividend will start growing next year

so here time period will be time period = 4 years

put value in equation 1 we get

FV = $2 ×
`(1 + 0.02)^4`

solve it we get

FV = $2.15

and

when Annual dividends will grow by 5% for 2nd and 3rd year and grow by 2% for 4th and 5th year

future value will be as

FV = PV ×
`(1 + r1)^(t1)` ×
`(1 + r2)^(t2)` ..............2

put here value and we get

FV = $2 ×
`(1 + 0.05)^(2)` ×
`(1 + 0.02)^(2)`

solve it we get

FV = $2.29