Michigan Co.just paid a dividend of $2.00 per share.Analysts expect future dividends to grow at 20% per year for the next four years and then grow at 6% per year thereafter.Calculate the expected dividend in year 5.

Question

Quizplus · Accepted Answer

In the first four years, the expected dividend will grow at 20% per year. Using the formula for the future value of an annuity, we can find the expected dividend in year 4:
Div4 = Div1*(1+g)^4 = 2*(1+.20)^4 = $4.10
After year 4, the dividend is expected to grow at 6% per year, so we can use the formula for the future value of a single sum to find the expected dividend in year 5:
Div5 = Div4*(1+g) = $4.10*(1+.06) = $4.35
Therefore, the closest answer is C) $4.40.