Question

2A. Firm ABC paid an annual dividend of $2.00 per share last year. Management just announced that future dividends will increase by 2 percent annually. What is the amount of the expected dividend in year 5? 2B. Firm ABC is going to pay an annual dividend of $2.00 per share next year. Management just announced that future dividends will increase by 2 percent annually. What is the amount of the expected dividend in year 5? 2C. Firm ABC is going to pay an annual dividend of $2.00 per share next year. Management just announced that future dividends will increase by 5 percent annually in the first two years and 2 percent annually afterwards. What is the amount of the expected dividend in year 5?

Answer 1

Answer:

FV  = $2.20

FV = $2.15

FV =  $2.29

Explanation:

given data

Annual dividend = $2

rate of interest = 2%

time period = 5

solution

we use here future value formula that is express as

FV = PV × $(1 + r)^t$    .........................1

here  FV is Future value and PV is Present value and r is rate and t is time

put here value and we get

FV = $2 × $(1 + 0.02)^5$

solve it we get

FV  = $2.20

and

when Dividend will start growing next year

so here time period will be time period =  4 years

put value in equation 1 we get

FV = $2 × $(1 + 0.02)^4$

solve it we get

FV = $2.15

and  

when Annual dividends will grow by 5% for 2nd and 3rd year and grow by 2% for 4th and 5th year

future value will  be as

FV = PV  ×  $(1 + r1)^{t1}$  ×  $(1 + r2)^{t2}$    ..............2

put here value and we get

FV = $2  ×  $(1 + 0.05)^{2}$   ×  $(1 + 0.02)^{2}$  

solve it we get

FV =  $2.29