Question

The Empower Company has a required rate of return, r, of 8.5 % and its current price, Po, is $60.00 per share. The dividend is expected to grow at a constant rate of 5.0 % per year. The current dividend Do, is $2.00 per share. Using the constant growth model, determine the expected year-end dividend at the end of year 4, D O$2.00 $243 O$2.72 $2.10

Answer 1

Expected year-end dividend at the end of Year 4 (D4)

Here, we’ve Dividend per share in Year 0 (D0) = $2.00 per share

Dividend growth rate (g) = 5.00% per year

Therefore, the Expected year-end dividend at the end of Year 4 (D4) = D0 x (1 + g)ⁿ

= $2.00 per share x (1 + 0.05)⁴

= $2.00 per share x (1.05)⁴

= $2.00 per share x 1.21550625

= $2.43 per share

“Hence, the Expected year-end dividend at the end of Year 4 (D4) will be $2.43”