Question

Weston Corporation just paid a dividend of $1.00 a share (i.e., D0 5 $1.00). The dividend is expected to grow 12% a year for the next 3 years and then at 5% a year thereafter. What is the expected dividend per share for each of the next 5 years?

Answer 1

Answer:

D1 =  $1.12

D2 =  $1.25

D3 =  $1.40

D4 =  $1.48

D5 =  $1.55

Explanation:

The formula to calculate dividends for next years is:

$D_n=D_{n-1}(1+g)$

Where D_n is successive year dividend

D_(n-1) is previous year dividend

g is the growth rate (given as 12% = 12/100 = 0.12)

Initial dividend is $1, D_0

So, lets calculate the dividends for 5 years:

Year 1:

D1 = 1(1+0.12) = 1(1.12) = $1.12

Year 2:

D2 = D1(1+g) = 1.12(1.12) = 1.2544 = $1.2544

Year 3:

D3 = D2(1+g) = 1.2544(1.12) = 1.404928 = $1.404928

Year 4:

D4 = D3(1+g) = 1.404928(1+0.05)1.404924(1.05) = $1.4751744

Year 5:

D5 = D4(1+g) = 1.4751744(1.05) = $1.54893312