Donuts Delite 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?

Question

Quizplus · Accepted Answer

To find the dividend for year 7, we need to first calculate the dividends for the first 3 years and then for the next 4 years.

Dividend for year 1 = $1.10

Dividend for year 2 = $1.10 x 1.08 = $1.188

Dividend for year 3 = $1.188 x 1.08 = $1.283

Dividend for year 4 = $1.283 x 1.08 = $1.386

Dividend for year 5 = $1.386 x 1.02 = $1.41372

Dividend for year 6 = $1.41372 x 1.02 = $1.441551

Dividend for year 7 = $1.441551 x 1.02 = $1.469 NOTE: The calculation for the dividend for year 7 is the following: ($1.10) (1.08^3) (1.02^4) = $1.469

Therefore, the correct answer is C.

Donuts Delite Just Paid an Annual Dividend of $1