Question

Four years ago, Bling Diamond, Inc., paid a dividend of $2.55 per share. The company paid a dividend of $2.97 per share yesterday. Dividends will grow over the next five years at the same rate they grew over the last four years. Thereafter, dividends will grow at 5 percent per year. What will the company’s cash dividend be in seven years?

Answer 1

Dividend growth rate for last four years = (Dividend four year ago/Dividend yesterday)^(1/4) -1

Dividend growth rate for last four years = (2.97/2.55)^(1/4) -1

Dividend growth rate for last four years = g1 = 3.885293%

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Growth rate for next 5 years = g1 = 3.885293%

Growth rate after 5 years = g2 = 5%

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Dividend in 7 years = Dividend yesterday x (1+g1)^5 x (1+g2)^2

Dividend in 7 years = 2.97 x (1+3.885293%)^5 x (1+5%)^2 = 3.961917

Cash Dividend in 7 years = $3.96