Otobai Motor Company is currently paying a dividend of $1.40 per year. The dividends are expected to grow at a rate of 18% for the next three years and then a constant rate of 5% thereafter. What is the expected dividend per share in year 5?
A) $2.35
B) $2.54
C) $2.91
D) $1.50

Question

Quizplus · Accepted Answer

- To calculate the expected dividend per share in year 5, we first need to calculate the dividends for the first three years using the dividend growth rate:

Year 1: $1.40 x (1 + 18%) = $1.65
Year 2: $1.65 x (1 + 18%) = $1.95
Year 3: $1.95 x (1 + 18%) = $2.31

- After this, we can use the constant growth rate of 5% to calculate the expected dividend in year 5:

Year 4: $2.31 x (1 + 5%) = $2.43
Year 5: $2.43 x (1 + 5%) = $2.55

- Therefore, the expected dividend per share in year 5 is $2.54.
- The correct choice is B.

Otobai Motor Company Is Currently Paying a Dividend of $1