Question

What is the expected dividend to be paid in 3 years if yesterday's dividend was $6.00, dividends are expected to grow at a constant 6% annual rate, and the firm has a 10% expected return

Answer 1

Answer:

D3 = $7.146096 rounded off to $7.15

Explanation:

The dividend growth projected for the stock expects the stock to grow at a constant rate of 6% each year over an indefinite period of time. This means that the $6 dividend paid by the stock in the current year will grow by 6% every year over its life. Thus, the expected dividend to be paid in 3 years will be calculated as follows,

Lets say that the dividend just paid is D0. Thus, the dividend to be paid in 3 years will be D3. So, D3 will be calculated as follows,

D3 = D0 * (1+g)^3

D3 = 6 * (1+0.06)^3

D3 = $7.146096 rounded off to $7.15