Michigan Co. is currently paying a dividend of $2.00 per share. The dividends are expected to grow at 20% per year for the next four years and then grow 6% per year thereafter. Calculate the expected dividend in year 5.
A) $4.15
B) $2.95
C) $4.40
D) $3.81

Question

Quizplus · Accepted Answer

Using the dividend growth formula, we can calculate the expected dividend in year 5 as:
Dividend in year 5 = Dividend in year 4 * (1 + growth rate)
Dividend in year 4 = Dividend in year 3 * (1 + growth rate)
Dividend in year 3 = Dividend in year 2 * (1 + growth rate)
Dividend in year 2 = Dividend in year 1 * (1 + growth rate)

So, we first need to calculate the dividend in year 1:

Dividend in year 1 = $2.00 per share

Then, we can calculate the dividends in years 2, 3, and 4:

Dividend in year 2 = $2.00 * (1 + 0.20) = $2.40 per share
Dividend in year 3 = $2.40 * (1 + 0.20) = $2.88 per share
Dividend in year 4 = $2.88 * (1 + 0.20) = $3.46 per share

Finally, we can calculate the dividend in year 5:

Dividend in year 5 = $3.46 * (1 + 0.06) = $3.68 per share

Therefore, the closest answer is C) $4.40.