Question

After paying a dividend of $1.90 last year, a company does not expect to pay a dividend for the next year. After that it plans to pay a dividend of 6.17 in year 2 and then increase the dividend at a rate of 3 percent per annum in years 3 to 6. What is the expected dividend to be paid in year 4?

Answer 1

Dividend for year 1 ( D1 ) = 0

Dividend in year 2 ( D2 )= $6.17

Dividend in year 3 ( D3) = D2 x (1 + Growth)

= $6.17 x 1.03

= $6.36

Dividend in year 4 = D3 x ( 1 + Growth )

= $6.36 x 1.03

= $6.55

So, dividend for year 4 = $6.55