Question

If the dividend yield for year one is expected to be 5% based on the current price of $50, what will year three dividend (DIV3) be if dividends grow at a constant 4%

Answer 1

Div₃ = $2.81

Step-by-step explanation:

dividend yield = current dividend / current stock price

0.05 = current dividend / $50

current dividend = $50 x 0.5 = $2.50

Div₀ = $.250

Div₁ = $2.50 x 1.04 = $2.60

Div₂ = $2.60 x 1.04 = $2.704 = $2.70

Div₃ = $2.704 x 1.04 = $2.81