Question

This morning Bitlab Inc. paid a dividend of $7.00 to its stockholders. The dividend w grow at 16% over the next 5 years. After 5 years, the dividends will grow at 9% for a years. After that, dividends will grow at the rate of 3% forever. What are the dividen values for years 5, 7 and 8, and the value of the stock today? A. D5= $12.67, D7 = $16, D8 = $17.99 B. D5 = $14.7, D7= $17.47, D8 = $17.99 OC. D5 = $14.7, D7= $16, D8 = $16.5 OD.D5= $12.67, D7 = $16, D8 = $15.49 OE. D5 = $14.7, D7= $17.47, D8 = $18.52

Answer 1

The dividend of year 5 is computed as shown below:

= Dividend just paid (1 + growth rate in the first five years)⁵

= $ 7 x 1.16⁵

= $ 14.70 Approximately

The dividend of year 7 is computed as shown below:

= Dividend just paid x (1 + growth rate in the first five years)⁵ x (1 + growth rate of dividend in next two years )²

= $ 7 x 1.16⁵ x 1.09²

= $ 17.47 Approximately

The dividend of year 8 is computed as shown below:

= Dividend just paid x (1 + growth rate in the first five years)⁵ x (1 + growth rate of dividend in next two years )² x (1 + growth rate in next year )

= $ 7 x 1.16⁵ x 1.09² x 1.03

= $ 17.99 Approximately

So, the correct answer is option B.

Feel free to ask in case of any query relating to this question