Ottocell Motor Company just paid a dividend of $1.40.Analysts expect its dividend to grow at a rate of 10% next year,8% for the following two years,and then a constant rate of 5% thereafter.What is the expected dividend per share at the end of year 5?

Question

Quizplus · Accepted Answer

We can use the dividend discount model to solve this problem:
D1 = $1.40 (given)
D2 = D1 x (1 + 10%) = $1.54
D3 = D2 x (1 + 8%) = $1.66
D4 = D3 x (1 + 8%) = $1.79
D5 = D4 x (1 + 5%) = $1.87

Therefore, the expected dividend per share at the end of year 5 is $1.87, which is closest to choice B ($1.98).

Ottocell Motor Company Just Paid a Dividend of $1