Question

Indigo Ink Supply paid a dividend of $4.5 last year on its common stock. It is expected that this dividend will grow at a rate of 8% for the next five years. After that, the company will settle into a slower growth pattern and plans to pay dividends that will grow at a rate of 3.6% per year. Investors require a return of 11% on the stock. a. What will be the dividend paid out for the next six years?

Answer 1

Answer:

D1 = $4.86

D2 = $5.25

D3 = $5.67

D4 = $6.12

D5 = $6.61

D6 =  $6.85

Explanation:

Dividend paid by Indigo Ink Supply at year 0 = Do =  $4.5

Growth rate for the first five years = 8%

Growth rate for the sixth year = 3.6%

The dividend paid out for the next six years are,

D1 = Do(1+ growth rate)

D1 = $4.5(1+8%) = $4.86

D2 = $4.86(1+8%) = $5.25

D3 = $5.25(1+8%) = $5.67

D4 = $5.67(1+8%) = $6.12

D5 = $6.12(1+8%) = $6.61

D6 = $6.61(1+3.6%) = $6.85