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 3 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

- Year 1 dividend = $1.10
- Year 2 dividend = $1.10 x (1 + 0.08) = $1.188
- Year 3 dividend = $1.188 x (1 + 0.08) = $1.283
- Year 4 dividend = $1.283 x (1 + 0.08) = $1.38664
- Year 5 dividend = $1.38664 x (1 + 0.02) = $1.41497
- Year 6 dividend = $1.41497 x (1 + 0.02) = $1.44369
- Year 7 dividend = $1.44369 x (1 + 0.02) = $1.47282
Therefore, the correct computation of the dividend for year 7 is $1.47282, which is choice C.

Donuts Delite Just Paid an Annual Dividend of $1