Question

Dunkin' Brands just paid an annual dividend of $1.10 a share. The firm expects to increase this dividend by 8 percent per year the following three years and then decrease the dividend growth to 2 percent annually thereafter. Which one of the following is the correct computation of the dividend for year 7? A. (S1.10) (1.08 x 3) (1.02 4) B. (S1.10) (1.08 3) (1.02 x 3) C. (S1. 10) (1.08) (1.02) D. (SI.10) (1.08) (102) E. (S1.10) (1.08) (1.02)

Answer 1

Answer:

Dividend in year 7 will be calculated as follows:

D3 = Do(1+g)n = 1.10(1+0.08)3

D7= Do(1+g)n(1+g)n = 1.10(1.08)3(1+0.02)4 = $1.4999

Explanation:

In the first instance, we need to calculate dividend in 3 year's time based on current dividend paid at 8% growth rate. Thereafter, we also need to calculate dividend from from year 4 to year 7(4 years) based on the new growth rate of 2%. The combination of these growth regimes gives the dividend in year 7.