Question

DT Motors paid its first annual dividend yesterday in the amount of $4.75 a share. The company plans to increase the dividend at a rate of 20 percent per year for the next 3 years. Thereafter, the dividend is expected to grow at 3.50 percent per year indefinitely. What is the amount of the dividend that is expected to be paid eight years from now (D8)

Answer 1

D8 = $9.748529197 rounded off to $9.75

Step-by-step explanation:

The dividend expected in 8 years from now or D8 can be calculated by applying the two stage growth in dividends to the last dividend paid or D0. The formula to calculate the a future dividend based on two stage growth of current dividend will be as follows,

Dn = D0 * (1+g1)^t1 * (1+g2)^t2

Where,

• Dn represents a future dividend
• g1 is the initial growth rate in dividends
• t1 is the time period in years during which dividend grows at g1 rate
• g2 is the constant growth rate in dividends
• t2 is the time period during which dividend grows at constant rate

D8 = 4.75 * (1+0.2)^3 * (1+0.035)^5

D8 = $9.748529197 rounded off to $9.75